U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check One)
[ ] Registration statement pursuant to Section 12 of the Securities Exchange
Act of 1934
or
[X] Annual report pursuant to section 13(a) or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 2003 Commission file number: 000-19763
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LORUS THERAPEUTICS INC.
(Exact name of registrant as specified in its charter)
ONTARIO 2836 NOT APPLICABLE
(Province or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number Identification Number
(if applicable)) (if Applicable))
2 MERIDIAN ROAD, TORONTO, ON., CANADA, M9W-4Z7
(403) 798-1200
(Address and Telephone Number of Registrant's Principal Executive Offices)
237 PARK AVENUE, NEW YORK, NEW YORK, 10017.3142, (212) 880-6000
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES (NO PAR VALUE)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
For annual reports, indicate by check mark the information filed with this Form:
[X] Annual Information Form [X] Audited Annual Financial Statements
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
171,517,341 COMMON SHARES
Indicate by check mark whether the registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to
the registrant in connection with such rule.
Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
DOCUMENTS FILED AS PART OF THIS REGISTRATION STATEMENT
See the Exhibit Index to this registration statement on Form 40-F for a
list of the documents that form a part hereof.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. UNDERTAKING.
Lorus Therapeutics Inc. (the "Company") undertakes to make available, in
person or by telephone, representatives to respond to inquiries made by the
Securities and Exchange Commission (the "Commission") staff, and to furnish
promptly, when requested to do so by the Commission staff, information relating
to: the securities registered pursuant to Form 40-F; the securities in relation
to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities.
B. CONSENT TO SERVICE OF PROCESS.
The Company has filed a Form F-X in connection with the class of securities
in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of the
Company shall be communicated promptly to the Commission by an amendment to the
Form F-X referencing the file number of the relevant registration statement.
TABLE OF CONTENTS
Sequential Page
Item Description Number
- ------- ----------- ---------------
1. Annual Information Form of the Registrant dated October 17, 2003 for 1
the fiscal year ended May 31, 2003.
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 30
3. Consolidated financial statements for the fiscal year ended May 31,
2003 and the auditors' report thereon (Note 14 to the Consolidated
Financial Statements relates to United States Accounting Principles
and Reporting (U.S. GAAP)). 38
4. Evaluation of Disclosure Controls and Procedures. 54
5. Exhibits
LORUS THERAPEUTICS INC.
ANNUAL INFORMATION FORM
FISCAL YEAR ENDED MAY 31, 2003
OCTOBER 17, 2003
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS .................................................... 3
DOCUMENTS INCORPORATED BY REFERENCE ........................................... 3
THE COMPANY ................................................................... 4
BUSINESS OF THE COMPANY ....................................................... 4
OVERVIEW .................................................................... 4
CANCER THERAPY TECHNOLOGIES ................................................. 5
PRINCIPAL PRODUCTS ............................................................ 6
VIRULIZIN(R) ................................................................ 6
ANTISENSE ................................................................... 10
SMALL MOLECULE CHEMOTHERAPIES ............................................... 12
OTHER TECHNOLOGIES .......................................................... 14
BUSINESS STRATEGY ............................................................. 14
MANUFACTURING ................................................................. 14
INTELLECTUAL PROPERTY AND PROTECTION OF CONFIDENTIAL INFORMATION AND TECHNOLOGY 14
LICENCE AGREEMENTS ............................................................ 15
REGULATORY REQUIREMENTS ....................................................... 16
REGULATORY STRATEGY ........................................................... 18
CO-DEVELOPMENT, MARKETING AND DISTRIBUTION .................................... 19
COMPETITION ................................................................... 19
HUMAN RESOURCES ............................................................... 20
PROPERTIES .................................................................... 20
SELECTED AUDITED CONSOLIDATED FINANCIAL INFORMATION ........................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS ..................... 22
SHARE CAPITAL AND MARKET FOR SECURITIES ....................................... 22
DIRECTORS AND OFFICERS ........................................................ 23
ADDITIONAL INFORMATION ........................................................ 26
GLOSSARY ...................................................................... 27
2
Unless otherwise noted or the context indicates otherwise (i) the
information appearing herein is stated as at October 17, 2003 (ii) all dollar
amounts referred to in this document are references to Canadian dollars and
(iii) the terms "Lorus", "we", "us", "our", "the Company", and similar
expressions, refer to Lorus Therapeutics Inc. together with our subsidiaries.
Virulizin(R) is a trademark of the Company. All other trademarks or
trade names referred to in this Annual Information Form are the property of
their respective owners.
FORWARD LOOKING STATEMENTS
This annual information form and documents incorporated by reference
contain forward-looking statements, which are based on the Company's current
expectations and assumptions, and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
anticipated. Readers are cautioned that all forward-looking statements herein
involve risks and uncertainties, including, without limitation, changing market
conditions, our ability to obtain patent protection and protect our intellectual
property rights, commercialization limitations imposed by intellectual property
rights owned or controlled by third parties, intellectual property liability
rights and liability claims asserted against us, the successful and timely
completion of clinical studies, the impact of competitive products and pricing,
new product development, uncertainties related to the regulatory approval
process, product development delays, our ability to attract and retain business
partners and key personnel, future levels of government funding, our ability to
obtain the capital required for research, operations and marketing and other
risks detailed from time-to-time in the Company's ongoing quarterly filings
annual information forms and, annual reports. These factors should be carefully
considered and readers should not place undue reliance on our forward-looking
statements. Actual events may differ materially from our current expectations
due to risks and uncertainties.
Documents Incorporated By Reference
The following documents are incorporated by reference in this annual
information form (the "Annual Information Form") of Lorus Therapeutics Inc.:
(a) our management's discussion and analysis of financial condition
and results of operations for the fiscal year ended May 31, 2003
(the "MD&A") found at pages 8 to 12, inclusive, of our annual
report for fiscal 2003 (the "Annual Report");
(b) our audited consolidated balance sheets as at May 31, 2003 and
2002 and the audited consolidated statements of loss and deficit
and cash flows for each of the years in the three year period
ended May 31, 2003 and the notes thereto, together with the
auditors' report thereon dated July 3, 2003 (collectively, the
"2003 Financial Statements") found at pages 13 to 24, inclusive,
of the Annual Report; and
(c) our management information circular dated October 17, 2003 (the
"Circular") prepared in connection with the November 20, 2003
annual meeting of the shareholders of Lorus Therapeutics Inc.,
other than the sections entitled "Composition of the Governance
Committee", "Report on Executive Compensation" and "Performance
Graph".
The MD&A and the 2003 Financial Statements, in their entirety, are
incorporated by reference in, and form part of, this Annual Information Form.
Specific portions of the Circular are incorporated by express reference in, and
form part of, this Annual Information Form. Those portions of the Circular not
so incorporated by express reference do not form part of this Annual Information
Form.
3
THE COMPANY
Lorus Therapeutics Inc. was incorporated under the Business
Corporations Act (Ontario) on September 5, 1986 under the name RML Medical
Laboratories Inc. On October 28, 1991, RML Medical Laboratories Inc. amalgamated
with Mint Gold Resources Ltd., resulting in the Company becoming a reporting
issuer (as defined under applicable securities law) in Ontario, on such date. On
August 25, 1992, Lorus changed its name to IMUTEC Corporation. On November 27,
1996, the Company changed its name to Imutec Pharma Inc., and on November 19,
1998, the Company changed its name to Lorus Therapeutics Inc.
The address of our head and principal office is 2 Meridian Road,
Toronto, Ontario, Canada, M9W 4Z7.
Lorus' subsidiaries are GeneSense Technologies Inc. ("GeneSense"), a
corporation incorporated under the laws of Canada of which Lorus owns 100% of
the issued and outstanding share capital and NuChem Pharmaceuticals Inc.
("NuChem"), a corporation incorporated under the laws of Ontario of which Lorus
owns 80% of the issued and outstanding share capital.
BUSINESS OF THE COMPANY
OVERVIEW(1)
We are a life sciences company focused on developing effective
anti-cancer therapies with low toxicity. We believe that we have established a
diverse anti-cancer product pipeline, supported by a growing intellectual
property portfolio. Our product pipeline is based on different platform
technologies in late pre-clinical or clinical stages of development and on other
technologies in research or early pre-clinical study. We seek to develop cancer
therapies that have low or no toxicity and, to date, our clinical and
pre-clinical data indicate a high safety profile for products in our pipeline.
Our business strategy includes developing our products alone or in collaboration
with third parties. Such collaborations may include partnering, in- or
out-licensing or a combination of these strategies.
Lorus seeks to reduce the risk associated with individual products or
single technology platforms by pursuing a wide variety of promising anti-cancer
compounds derived from different platform technologies. Lorus' objective is to
develop compounds that are efficacious and have low-toxicity, ensuring the drugs
will be well tolerated by patients and will be able to be tested in combination
with other approved compounds on the market.
From January 1987 to December 1997, we focused our efforts solely on
the development of Virulizin(R), a potential new drug functioning as a biologic
response modifier for the treatment of cancer. In November 1997 we, through
NuChem, sub-licensed, on an exclusive world-wide basis until the later of patent
expiry or marketing approval, from Ion Pharmaceuticals, Inc. ("Ion") (a
wholly-owned subsidiary of Sheffield Pharmaceuticals, Inc.) analogues of
clotrimazole ("CLT"), a molecule with anti-angiogenic and anti-proliferative
properties, for anti-cancer indications as well as actinic keratosis. In 2003,
we announced that we had licensed through NuChem, this technology platform to
Cyclacel Limited, a UK based pharmaceutical company. See "Principal
Products--Small Molecule Chemotherapies--Arrangements with Cyclacel".
On October 29, 1999, we acquired all of the issued and outstanding
shares of GeneSense (the "GeneSense Acquisition"), a private biopharmaceutical
company that specializes in developing novel
- --------
(1) For ease of reference, a glossary of terms used in this Annual Information
Form can be found beginning on page 27.
4
oligonucleotide therapeutics for cancer and infectious diseases. Pursuant to the
GeneSense Acquisition, we obtained two anti-cancer products in late-stage,
pre-clinical development, in addition to several other products in the research
stage. We believe that the GeneSense Acquisition also added depth to our
research and development capabilities.
As a consequence of the GeneSense Acquisition, we now hold an
exclusive world-wide license from the University of Manitoba and Cancer Care
Manitoba (formerly The Manitoba Cancer Treatment and Research Foundation) to
develop certain oligonucleotide technologies. Antisense technology, one of the
oligonucleotide technologies, works at the genetic level to interrupt the
process by which disease-causing proteins are produced in order to treat a wide
range of diseases, including cancer and infectious diseases.
CANCER THERAPY TECHNOLOGIES
CANCER BIOTHERAPY
Chemotherapeutic drugs have been a major medical treatment for cancer,
particularly metastatic cancer, for the past 30 years. However, a wide range of
new cancer drugs have been developed by biotechnology companies that help
improve patients' quality of life. Unlike chemotherapies which are chemically
based, these new drugs are biological, based on naturally occurring proteins or
genetic material. The biotherapies in development include immunotherapy, gene
therapy, and angiogenesis inhibitors. While chemotherapy drugs are typically
toxic and delivered systemically, these biological agents are targeted to the
tumor and, more specifically, to individual molecules or genes. These agents
promise to have few and only mild side effects which means that, in theory,
larger, and therefore more effective, doses can be administered.
Our lead products span three classes of anti-cancer therapies: (i)
immunotherapy, based on macrophage stimulating biologic response modifiers; (ii)
antisense therapies, based on synthetic segments of DNA designed to bind to the
messenger RNA (mRNA) that is responsible for the production of proteins
over-expressed in cancer cells, and (iii) small molecule chemotherapies
targeting anti-angiogenic, anti-proliferative and anti-metastatic pathways. We
have a number of other anti-cancer technologies in the research and pre-clinical
stages of development, including gene therapy and U-Sense technology.
Lorus' product pipeline is illustrated below, summarizing the stage of
development of our products.
5
LORUS PRODUCT PIPELINE
(PRODUCT DEVELOPMENT PIPELINE GRAPH)
PRINCIPAL PRODUCTS
VIRULIZIN(R)
Immunotherapy is a form of treatment that stimulates the body's immune
system to fight diseases such as cancer. Tumor cells in cancer present antigens,
or markers, on their surfaces that can be recognized by the immune system. Once
these antigens stimulate the immune response, macrophages (and other immune
cells) become activated, leading to the production of a variety of cytokines
(proteins involved in the immune response), which promote and enhance the immune
system's ability to recognize and attack tumor cells.
The human immune system and the body's other protective cellular and
molecular systems constitute a complex network of organs, tissues and cells
which protect the body against foreign substances such as viruses, foreign
tissue and cancer. Appropriate immune system response is critical to both health
and survival. When the immune system functions properly, the system recognizes
and effectively eliminates foreign substances. Conversely, inadequate or
suppressed immune function may result in disease and, possibly, death. When
inadequate or suppressed immune function occurs, modification or enhancement of
the immune system may restore normal function. Immune system modification or
enhancement may be achieved through the use of therapeutic products that
stimulate or activate the immune system to achieve a desired response.
In recent years, a major focus of the biotechnology industry has been
to develop naturally occurring human therapeutics, which are referred to broadly
as biologic response modifiers ("BRMs"), and are so described because they are
able to influence certain cellular events in the body. Many different substances
are classified as BRMs and they have varied biological activities. Some of the
major categories of BRMs include interferons (naturally occurring proteins
capable of killing cancer cells or inhibiting their growth), interleukins
(growth factors that stimulate cells of the immune system to fight cancer) and
cytokines (substances produced by immune system cells, usually to send messages
to other cells). BRMs have applications in a variety of diseases, including
cancer, and are currently being employed in the area of cancer immunotherapy.
BRMs may be used alone, in various combinations with other BRMs, or as adjuncts
to other therapies.
6
Virulizin(R), Lorus' immunotherapeutic drug, has been shown to act by
enhancing cell mediated immune responses. Virulizin(R) activates microphages,
which in turn activate natural killer cells. Both cell types release anti-tumour
cells. Types of white blood cells, monocytes and macrophages are key players in
the immune response to foreign invaders, including tumor cells. When macrophages
and monocytes are activated, they produce proteins called cytokines, which have
the ability to kill tumor cells directly. Virulizin(R) stimulates the release of
tumor necrosis factor (TNF-alpha), one type of cytokine, in immune cells to
induce apoptosis (programmed cell death) of tumor cells. It is likely that
because the drug works by encouraging the immune system to attack the cancer,
rather than killing the cancerous cells itself, studies suggest that
Virulizin(R) produces fewer negative side effects than commonly used
chemotherapy agents.
PRE-CLINICAL TESTING
Toxicity studies conducted at independent laboratories have shown
Virulizin(R) to have a good safety profile. No demonstrable LD50 was determined
during these studies, and repeated administrations of Virulizin(R) did not
result in organ system toxicities. In November 1998, additional preclinical data
on the efficacy of Virulizin(R) was obtained from studies performed at the
University of Nebraska Medical Center. We performed these supporting studies to
determine the efficacy of Virulizin(R) in connection with gemcitabine, an Eli
Lilly product that is the standard for first-line treatment of pancreatic
cancer, in a human tumor xenograft model commonly used for pancreatic cancer.
After extended daily administration, Virulizin(R) significantly inhibited tumor
growth in this model compared to a placebo. Virulizin(R) also showed a trend
towards an additive anti-tumor activity when combined with gemcitabine.
In January 2001, Lorus reported that Virulizin(R) demonstrated better
anti-tumor activity in mice containing human breast cancer tumor cells than
Taxol, one of the current standard treatments available for breast cancer.
Additional findings revealed that the most outstanding anti-tumor activity
occurred when Virulizin(R) and Taxol were used in combination. Also, in August
2001, we announced pre-clinical results of Virulizin(R) at the international
conference Drug Discovery Technology 2001. The results of four independent tests
with mice inoculated with human large cell lung carcinoma cells, small cell lung
carcinoma cells, ovarian adenocarcinoma cells and prostatic carcinoma cells
showed significant improvement over the current standard of treatment or the
saline control.
CLINICAL DEVELOPMENT PROGRAM
Our clinical trials were primarily established to determine the safety
and efficacy of Virulizin(R) as a single therapeutic agent for treating the most
serious or life threatening cancer indications. These clinical trials involved
Stage III and Stage IV cancer patients who had been diagnosed with cancers that
were life-threatening and for which there were no established effective
therapies. Approximately 250 patients had been enrolled in the clinical trials
conducted in the United States, Canada, and Mexico and others have received
Virulizin(R) through Lorus' special access program.
Lorus received orphan drug designation from the United States Food and
Drug
7
Administration ("FDA") in February 2001 for Virulizin(R) in the treatment of
pancreatic cancer. Orphan drug status is awarded to drugs used in the treatment
of a disease that afflicts less than 200,000 patients annually in the United
States to encourage research and testing. Incentives for orphan product
development include seven year marketing exclusivity for orphan drug sponsors,
tax incentives and research grants. Approval of an orphan designation request
does not, however, alter the regulatory requirements for obtaining marketing
approval.
In April 2002, we presented data supporting both the mechanism of
action and the characterization of Virulizin(R), at the American Association for
Cancer Research Conference. This knowledge of the composition of Virulizin(R)
has enabled us to initiate a pre-clinical research program for the development
of novel immunotherapeutic products. One such product has recently been tested
in vivo and compared to Virulizin(R) for anticancer activity. Results from these
pre-clinical tests indicated that Virulizin(R) and the new immunotherapeutic
product exhibited strong antitumor activity in mouse models with human
pancreatic carcinoma tumors.
In addition, in June 2002 we announced that the FDA had awarded Fast
Track designation to Virulizin(R) in the treatment of advanced pancreatic
cancer. While this designation does not provide any assurance that Virulizin(R)
will be approved, receive priority review or accelerated approval, it provides
us with certain benefits, including scheduled meetings to seek FDA input into
development plans, the option of submitting an NDA in sections rather than all
components simultaneously, and the option of requesting evaluation of studies
using surrogate endpoints. The Fast Track designation applies to the combination
of a product and the specific medical condition for which it is being studied.
It is possible to lose the Fast Track designation if the product ceases to meet
the criteria.
In November 2002, we announced that we had renewed our emergency drug
release program. This program permits the supply of Virulizin(R) to cancer
patients worldwide who are not eligible for ongoing clinical trials. The drug is
supplied by their physicians for the treatment of advanced pancreatic cancer.
We have initiated a Phase III clinical trial to evaluate Virulizin(R)
for the treatment of advanced pancreatic cancer pursuant to a protocol filed
with FDA. If this trial is successful, we intend to present the results of this
clinical trial to the FDA in a new drug application at the completion of the
study. This double-blind, randomized clinical trial is designed to be conducted
at approximately 40 North American medical centres with the goal of enrolling
350 patients with advanced pancreatic cancer. Patients enrolled in the study
will be randomised to receive either treatment with gemcitabine or treatment
with gemcitabine in combination with Virulizin(R). Those patients who fail or
become resistant to gemcitabine will then be treated with 5-Fluorouracil (5-FU)
or with 5-FU in combination with Virulizin(R). Our study protocol provides that
all study subjects will be monitored throughout the remainder of their lifespan.
The end points of the study will be survival and clinical benefits, and the
duration is expected to be approximately three years.
In April 2003, we announced that Virulizin(R), currently in a pivotal
Phase III trial, would be expanded to include approximately 50 clinical trial
sites in North America and Latin America. In addition to the 40 clinical sites
and several new major cancer centers throughout the United States, we have
expanded the trial to 10 major oncology centers in Canada and Mexico. In
September 2003, we announced an expansion of this trial into Russia, Ukraine and
Romania. Participating Canadian centers include McGill University in Montreal
and the Cross Cancer Center in Edmonton, Alberta. In Mexico it will include the
National Cancer Institute of Mexico and the National Medical Center in Mexico
City, which are two of Latin America's leading oncology centers.
Virulizin(R) has been approved for sale and is being sold in the
private market in Mexico for the treatment of malignant melanoma pursuant to a
distribution agreement with Mayne Pharma
8
(Canada) Inc. (formerly Faulding Canada Inc.). Mayne Pharma has also exercised
an option to obtain similar marketing rights in Brazil and Argentina. See
"Co-Development, Marketing and Distribution". Components of Virulizin(R) were
identified in a chemical composition characterization and this knowledge was
used to formulate a second generation immunotherapy, called Neo-Virulizin, which
is presently in pre-clinical investigation.
CLINICAL TRIAL RESULTS
In September 1992, we completed a Phase II clinical trial of
Virulizin(R) in Canada for the treatment of pancreatic adenocarcinoma.
Pancreatic adenocarcinoma develops in the glands that produce enzymes that
travel through the pancreatic duct to the small intestine to aid digestion.
Approximately 90% of pancreatic cancers are pancreatic adenocarcinomas. The
historic median survival from date of diagnosis for late stage pancreatic
adenocarcinoma patients is approximately 120 days with a one-year survival rate
of 13.8% (Brijir Gudjonsson, "Cancer of the Pancreas -- 50 Years of Surgery"
(1987) 60 Cancer 2284). In our Phase II clinical trial, the median survival for
advanced pancreatic adenocarcinoma patients with an expectation of at least
three months survival treated with Virulizin(R) was 219 days, and the one-year
survival rate was 35%. Disease stabilization was reported in 35% of the
evaluable patients for more than three months. None of these patients developed
any clinical or laboratory evidence of drug-related toxicity ((1994) 17 Clinical
Investigative Magazine 37-41).
In September 1993, we completed a Phase II clinical trial of
Virulizin(R) in Mexico in the treatment of advanced malignant melanoma. Advanced
malignant melanoma is a type of skin cancer with a tendency to spread via the
lymphatic system and blood supply to other organs and tissues. The historic
median survival from the date of diagnosis of advanced malignant melanoma was 93
days with a one-year survival rate of 13% (C.M. Balch, et al., eds., Cutaneous
Melanoma, 2nd ed. (Philadelphia: J.B. Lippincott, 1992)). In our Phase II trial,
the median survival from the date of diagnosis for advanced malignant melanoma
patients treated with Virulizin(R) was 396 days and the one-year survival rate
was 54%. Only a few mild to moderate adverse events related to treatment with
Virulizin(R) were reported including pain at the injection site and fever. The
interim results from this multi-center Phase II clinical trial were presented at
the Baylor College of Medicine Research Symposium in April 1993. Based upon the
results of the Mexican trial, Lorus filed an NDA in November 1996, to obtain
marketing approval of Virulizin(R) in Mexico as a treatment for advanced
malignant melanoma. In October 1997, Lorus received a license from the SSA to
sell Virulizin(R) in Mexico in the private market for the treatment of malignant
melanoma.
In August 1998, Lorus released results of the Phase I/II trial
evaluating Virulizin(R) in patients with pancreatic cancer at the Rush Cancer
Institute. Of the 26 patients enrolled, 19 were deemed evaluable according to
the study protocol. We announced that the overall median survival for all
evaluable patients was 6.7 months and the six-month survival rate was 58%. These
results confirm and extend previous studies performed by us in Canada in
pancreatic cancer patients. Results of this study have also shown that
Virulizin(R) continues to show a good safety profile, and there is an increasing
trend and a statistically significant improvement in total quality-of-life
change score.
FUTURE APPLICATIONS
We believe that in vitro and in vivo research supports the therapeutic
potential of Virulizin(R) in the treatment of diseases associated with immune
system disorders other than cancer. Our scientists have also conducted
pre-clinical research in the use of Virulizin(R) in combination with known
cytotoxic or chemotherapeutic agents in the treatment of cancer. We intend that
the results from these studies will form the basis for a potential clinical
program of Virulizin(R) in combination with other cancer therapeutic agents. We
cannot assure you, however, that we will enter into this or any other clinical
program.
9
ANTISENSE
Many chemotherapeutic drugs are chemicals designed to induce or
inhibit the function of a target molecule, typically an enzyme or receptor. The
selectivity of these drugs is usually determined by only a few, generally two or
three, points of interaction at the binding site of a target molecule.
Frequently, sites on other non-target molecules resemble the target-binding site
sufficiently to permit the conventional drug to bind to some degree. This
indiscriminate affinity or lack of specificity can result in decreased efficacy,
unwanted side effects, and increased toxicity. Overcoming these limitations has
been a primary goal for recent anti-cancer drug development. One such method
involves the use of antisense therapies.
The human metabolism is essentially controlled by proteins produced by
the body. Since most human diseases, including cancer, can be traced to faulty
protein production, traditional therapeutics are designed to interact with the
disease causing proteins. Most current anti-cancer drugs either damage DNA or
proteins within cells (e.g., chemotherapy) or inhibit protein or small molecule
function (e.g., estrogen blockers, such as Tamoxifen). Antisense therapeutics
take a different approach to treatment: they are designed to prevent the
production of the proteins causing the disease.
Antisense oligonucleotides are synthetic segments of DNA designed to
bind to the mRNA that is responsible for the production of disease-associated
proteins. The sequence of nucleic acid bases in an antisense oligonucleotide is
complementary to its nucleic acid target sequence on the mRNA. Thus, the
antisense oligonucleotide binds at a significant number of points to the target
site, and hybridizes (binds) tightly to the selected mRNA. Since a single mRNA
may be translated repeatedly into a protein, a single antisense oligonucleotide
may inhibit the synthesis of many copies of a protein. Moreover, in vitro tests
have shown that these antisense/mRNA complexes activate enzyme activity that
destroys the mRNA to which the oligonucleotide is bound, without destroying the
oligonucleotide itself. This frees the oligonucleotide to bind with another
identical target mRNA and repeat the inhibitory process. Furthermore, it is
possible that an antisense molecule may inhibit specific expression by binding
to the gene responsible for coding for the mRNA molecule preventing the mRNA
molecule from being synthesized. It may also bind to an unprocessed mRNA
molecule, preventing it from developing into a mature mRNA, or it may bind to a
specific mRNA molecule preventing it from translocating from the nucleus of the
cell to the cytoplasm where protein synthesis occurs.
The main attributes of antisense therapies are specificity and
rational design. As a function of the simple nucleotide base-pairing rules,
therapeutic intervention using antisense compounds can be a universal approach
to a number of diseases whose causative agents or targets have been
characterized at the DNA level. The specificity of an antisense therapeutic is
determined by the occurrence of a given nucleotide sequence. It has been
calculated that a 17-mer (17 nucleotides) oligonucleotide sequence should
theoretically appear only once in the human genome. Furthermore, the binding
affinity between complementary strands of nucleic acids is exceptionally high.
It is expected that antisense's combination of high specificity and affinity,
which is difficult to achieve with conventional protein-targeted drugs, could
substantially reduce side effects due to unwanted interference with other
essential cellular activities.
The rational design of oligonucleotides aimed at the inhibition of
gene expression is based on targeting nucleotide sequences. Thus, an advantage
of developing antisense compounds is that the design and synthesis are
relatively straightforward. The structure of 20-mer antisense oligonucleotides,
which is complementary to all possible 20 base sequences within a 1,000 base
mRNA sequence, is strictly defined.
The unique premise of this therapeutic approach is to target an
earlier stage of the biochemical process than is usually possible with
conventional drugs. Traditional therapies usually interact with the final
synthesized or processed protein, whereas this newer approach alters an earlier
10
expression of the gene that codes for such a protein. Therefore, it is believed
that drugs based on this approach may have broad applicability, greater efficacy
and fewer side effects than conventional drugs.
The effectiveness of an antisense drug is largely dependent on the
protein targeted. We have developed a number of antisense drugs, of which our
lead products are GTI-2040 and GTI-2501. These products target the different
mRNAs (messenger ribonucleic acids) of ribonucleotide reductase "RNR")
components. RNR is a highly regulated, cell cycle-controlled activity required
for DNA synthesis and repair. RNR is made up of two components, R1 and R2,
encoded by different genes, and promotes the formation of deoxyribonucleotides,
which are the building blocks of DNA. We have developed antisense molecules
specific for the mRNA of the R1 or the R2 components of RNR, since its activity
tends to be elevated in tumor cell populations. The R2 component also appears to
be a signal molecule in cancer cells and its elevation is believed to modify a
biochemical pathway that can increase the malignant properties of tumor cells.
Consequently, reducing the expression of the RNR components in a tumor cell with
antisense drugs is expected to have antitumor effects.
In June 2003, our scientists published the results of experimental
studies of mouse models bearing human tumors treated with GTI-2040. The results
appear in the article titled, "GTI-2040, An Antisense Agent Targeting the Small
Subunit Component (R2) of Human Ribonucleotide Reductase, Shows Potent
Anti-tumor Activity against A Variety of Tumors," in the June issue of the
publication: Cancer Research.
Clinical Development Program
GTI-2040
GTI-2040 is an antisense drug that targets the R2 component of RNR and
has exhibited anti-tumor properties against 13 different human cancers in
standard mouse models. GTI-2040 is currently in a Phase II clinical trial for
advanced or metastatic renal cell carcinoma. We have entered into a clinical
trials agreement with the United States National Cancer Institute ("US NCI"),
pursuant to which the US NCI has agreed to sponsor (including financial support
of clinical trial costs) multiple Phase I and Phase II clinical trials to be
conducted with GTI-2040, alone or in combination with other cancer therapies.
Lorus will provide drug for all trials under this agreement. These studies will
evaluate the safety and activity of GTI-2040 in certain cancer tumors, which may
include breast cancer, colon cancer, non-small cell lung cancer, acute myeloid
leukemia, and a range of other solid tumors. In addition, the FDA has awarded
Orphan Drug Status under the United States Orphan Drug Act to GTI-2040 for the
treatment of renal cell carcinoma. For Lorus, receiving Orphan Drug Status for
GTI-2040 in the treatment of renal cell cancer means that the FDA will help to
facilitate the drug's development process by providing financial incentives and
grating seven years of market exclusivity in the United States upon approval of
the drug in the United States. Approval of an orphan designation request does
not, however, alter the regulatory requirement, for obtaining market approval.
Formal preclinical development of GTI-2040, including manufacturing
and toxicology studies, was initiated in mid-1998. An IND application filed with
the FDA was approved on December 7, 1999 for a Phase I/II clinical trial of
GTI-2040, given as a 21-day continuous intravenous infusion in the treatment of
solid tumor and lymphoma. This trial was initiated in December 1999 under the
direction of Dr. Richard Schilsky of the Chicago Cancer Research Center. 36
patients with advanced or metastatic solid tumors were enrolled in this study.
On the basis of the results obtained, Phase I clinical endpoints for safety and
tolerability have been met. Doses ranging from 18.5 mg/m2/day to 222.0 mg/m2/day
have been studied and found to display favourable safety profiles. Based on
studies indicating that the R2 target would be down-regulated at concentrations
of GTI-2040 of 185.0 mg/m2/day, the recommended Phase II dose for GTI-2040
administered as a single agent is 185.0 mg/m2/day.
In February 2003, we announced an expansion of our ongoing Phase II
clinical trial of
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GTI-2040, in renal cell carcinoma to five major oncology centers in the United
States. In the current study, conducted by Dr. Frank Torti, director of the
Comprehensive Cancer Center at Wake Forest University School of Medicine,
GTI-2040 is being studied in combination with capecitabine for the treatment of
advanced renal cell carcinoma in patients who have failed previous
chemotherapies.
Also in February of 2003, we announced that the U.S. NCI had approved
clinical protocols to conduct a series of Phase II clinical trials to
investigate the safety and efficacy of GTI-2040 in breast cancer, colon cancer,
non-small cell lung cancer, acute myeloid leukemia, prostate cancer, and in a
range of solid tumours. Lorus and the U.S. NCI collaborated to select six cancer
indications from 29 proposals submitted by major U.S. NCI and Canadian oncology
centers. The initial six studies represent the first stage of clinical
development partnership between Lorus and the U.S. NCI. In August of 2003 we
announced that the FDA approved the U.S. NCI Investigational New Drug
Application to begin a Phase II clinical trial to investigate Lorus' lead
antisense drug, GTI-2040, as a treatment for metastatic breast cancer in
combination with capecitabine.
In July 2003 we announced the FDA's approval of the US NCI-sponsored
Investigational New Drug application for a clinical trial of our lead antisense
drug, GTI-2040 in combination with cytarabine, in patients with refractory or
relapsed acute myeloid leukemia ("AML"). Cytarabine is the current established
drug for treating AML patients.
In Canada, we obtained approval from Health Canada in September 2003
for initiation of a clinical trial of GTI-2040 in combination with docetaxel for
the treatment of advanced non-small cell lung cancer ("NSCLE"), as part of a
Phase II clinical program of GTI-2040 in collaboration with the US NCI.
GTI-2501
GTI-2501 is another antisense drug, which targets the R1 component and
has demonstrated anti-tumor activity in a wide range of human cancers in
standard mouse models including human breast, kidney and prostate cancers.
During 2001, we initiated a Phase I clinical trial of GTI-2501 in patients with
a variety of tumor types. The endpoints for this trial are to establish the
recommended clinical Phase II dose, as well as look at the safety profile of
GTI-2501. We recently signed a letter of intent with Sunnybrook and Women's
College Health Sciences Centre in Toronto, Ontario in respect of a Phase II
clinical trial for GTI-2501 and we anticipate beginning the trial for the
treatment of advanced metastatic prostate cancer later this year.
GLP-toxicology studies for GTI-2501 were completed in November 2000,
and approval of an IND was received from the U.S. FDA February 2001. This Phase
I dose-escalating study is underway at the University of Chicago Medical Centre
and is designed to establish the recommended clinical Phase II dose as well as
look at the safety profile of GTI-2501. Patients with solid tumors or lymphoma
are being enrolled.
In May 2003 we announced our intention to move our antisense,
anticancer drug, GTI-2501 into a Phase II clinical trial for the treatment of
advanced metastatic prostate cancer in the fall of 2003. Lorus has signed a
Letter of Intent to conduct this clinical study with Dr. Laurence Klotz of the
College Health Sciences Center in Toronto, Canada.
SMALL MOLECULE CHEMOTHERAPIES
Most currently employed anti-cancer chemotherapeutic drugs are DNA
damaging, cytotoxic agents, designed to act on rapidly dividing cells. These
drugs typically include unpleasant or even serious side-effects due to their
non-specificity to cancer cells, and frequently lead to tumor-acquired drug
resistance. As a result of these limitations, there is an ongoing intensive
world-wide effort to
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discover more effective anti-cancer drugs.
Arrangements with Ion
In December 1997, Lorus, through NuChem, acquired certain patent
rights and a sublicense from Ion to develop and commercialize the anti-cancer
applications of CLT and new chemical entities related to CLT (the "NuChem
Analogues"). The consideration for this acquisition was Ion's 20% common share
interest in NuChem, US$350,000 in common shares of the Company and amounts
totalling up to US$3,500,000 payable in cash. On June 15, 1998, we issued from
treasury 583,188 common shares in settlement of the US$350,000 obligation. To
August 31, 1999, NuChem had made cash payments totalling $714,750 (US$500,000)
to Ion. The balance is payable upon the achievement of certain milestones based
on the commencement and completion of clinical trials related to the NuChem
Analogues.
All research and development activities to be undertaken by NuChem are
to be funded by us through subscriptions for non-participating preference shares
of NuChem. As at May 31, 2003, Lorus had provided a total of $5,983,000 of
funding to NuChem.
If NuChem fails to make any of the payments described above,
discontinues its research and development activities related to the NuChem
Analogues or commits an act of insolvency or bankruptcy, Ion has the right to
re-acquire the NuChem Analogues assigned to NuChem and to terminate the
sublicense, upon the payment by Ion of a certain amount and subject to certain
other conditions.
Lorus and Ion are parties to a unanimous shareholders' agreement
relating to NuChem. Under that agreement, Lorus has the right to appoint
NuChem's officers and a majority of the members of NuChem's board of directors.
Lorus directs the business and operations of NuChem, subject to the terms of an
annual business plan that Ion is entitled to approve. Any profits that are
distributed from NuChem will be shared between Lorus and Ion in proportion to
their ownership of NuChem common shares. The unanimous shareholders' agreement
provides mutual restrictions on the transfer of NuChem shares, as well as mutual
rights of first refusal, drag-along and piggyback rights. If Ion becomes
entitled to re-acquire the NuChem Analogues assigned to NuChem and to terminate
the sublicense, Lorus is entitled to purchase Ion's NuChem shares for their
stated capital amount.
Nuchem Analogues
On February 7, 2000, Lorus announced that NuChem had determined that
one of its key anti-cancer CLT analogues, NC381, showed positive pre-clinical
results in inhibiting the spread of human melanoma tumor cells in mice. NC381,
whether administered through injection or orally, exhibited anti-metastatic
activity with few apparent side effects with 16 mice.
NC381 has demonstrated pre-clinical activity in lung, pancreatic and
kidney cancers as well as anti-angiogenic, anti-proliferative, and
anti-metastatic properties. Research suggests that it can be taken orally, which
positions it as a potential maintenance therapy. NC381 requires further testing
to complete its ongoing pre-clinical development in Canada and the United
States.
Arrangements with Cyclacel
On September 24, 2003 we announced that together with our subsidiary,
NuChem, we had entered into a license agreement with Cyclacel Limited
("Cyclacel") a UK-based biopharmaceutical company. Under the terms of the
license agreement, Cyclacel will have exclusive worldwide license agreement for
the development and commercialization of Lorus' pre-clinical compound NC 381.
The agreement extends to other drug candidates that Cyclacel may identify from
the library of CLT analogues licensed by NuChem from Harvard Medical School.
Under the terms of the agreement, Lorus will receive upfront fees of US $400,000
and milestone payments, which assuming all milestones are achieved, will total
approximately US $11.6 million for NC 381, and similar milestone payments for
each of any other
13
compounds developed from the compound library. In addition to these payments,
Lorus will receive royalties based on product sales. Cyclacel will be
responsible for all future drug development costs.
OTHER TECHNOLOGIES
Several promising new product opportunities have been introduced to
the Lorus portfolio and are being assessed for their potential as new drug
candidates. They include platform technologies in areas of tumor suppressor gene
therapy, and U-Sense compounds that we believe to have the potential to work
through a unique mechanism of action to decrease the expression of cancer
relevant genes. Further antisense approaches for the treatment of cancer and
drug resistant bacteria are also being investigated in our laboratory. In
addition, we are developing a functional genomics research program with the aim
of identifying unique drugs with anti-cancer or antibacterial activity. We
intends to continue developing these compounds with the aim to identify new drug
candidates for clinical trials as the three lead drugs make their way through
clinical trials and to market.
BUSINESS STRATEGY
By developing cancer therapeutics using different mechanisms of action
that may be efficacious against a wide variety of cancers, we seek to maximize
our opportunity to address multiple cancer therapeutic markets. In our efforts
to obtain the greatest return on our investment in each drug candidate, we
separately evaluate the merits of each candidate throughout the clinical trial
process and considers commercialization opportunities when appropriate. We
intend to partner with pharmaceutical companies for the sales, marketing and
distribution of our products. See "Co-development, Marketing and Distribution."
MANUFACTURING
We have entered into a contract with Proligo LLC, a cGMP manufacturer,
to produce our bulk active drug substance for our antisense compounds. The
manufacturer supplied bulk active drug for Good Laboratory Practices (GLP)
toxicology studies and drug stability studies and has supplied bulk active drug,
subsequently formulated, for both the GTI-2040 and GTI-2501 clinical trials.
Proligo has filed a drug master file (DMF) with the FDA and have supplied the
necessary documentation to support the IND submission.
In March 2001, we signed an agreement with Dalton Chemical
Laboratories Inc. for the manufacturing of our immunotherapeutic compound,
Virulizin(R). The drug is being manufactured for the Phase III clinical trial
program that we initiated in fiscal 2002 as well as to supply our licensee,
Mayne Pharma Inc. (formerly Faulding Canada Inc.) with Virulizin(R) for
malignant melanoma treatment in Mexico.
Intellectual Property and Protection of Confidential Information and
Technology
We regard our issued patents and pending applications as important in
establishing and maintaining a competitive position with respect to our products
and technology. As at October 1, 2003, we own or have rights under approximately
50 issued or pending patents in Canada and the United States as well as over 120
issued and pending patent applications in other jurisdictions around the world.
With regard to antisense compounds, we believe we have protected our
intellectual property rights by, among other things, filing patent applications
with respect to intellectual property considered important to the development of
our business. We also rely upon trade secrets, unpatented know-how and
continuing technology innovation to develop and maintain our competitive
position.
We cannot assure you, however, that pending applications will result
in issued patents, or
14
that issued patents will be held valid and enforceable if challenged, or that a
competitor will not be able to circumvent any such issued patents by adoption of
a competitive, though non-infringing product or process. Interpretation and
evaluation of pharmaceutical or biotechnology patent claims present complex and
often novel legal and factual questions. Our business could be adversely
affected by increased competition in the event that any patent granted to us is
held to be invalid or unenforceable or is inadequate in scope to protect our
operations.
While we believe that our products and technology do not infringe
proprietary rights of others, we cannot assure you that third parties will not
assert infringement claims in the future or that such claims will not be
successful. Furthermore, we could incur substantial costs in defending against
patent infringement claims brought by others or in prosecuting suits against
others.
In addition, we cannot assure you that others will not obtain patents
that we would need to license, or that if a licence is required that it would be
available on reasonable terms, or that if a licence is not obtained that Lorus
would be able to circumvent, through a reasonable investment of time and
expense, such outside patents. Whether we obtain a licence would depend on the
terms offered, the degree of risk of infringement, the vulnerability of the
patent to invalidation, and the ease of circumventing the patent.
Until such time, if ever, that further patents are issued to Lorus, we
will rely upon the law of trade secrets to the extent possible given the
publication requirements under international patent treaty laws and/or
requirements under foreign patent laws to protect our technology and the
products incorporating the technology. In this regard, we have adopted certain
confidentiality procedures. These include: limiting access to our confidential
information to certain key personnel; requiring all of our directors, officers,
employees and consultants and others who may have access to our intellectual
property to enter into confidentiality agreements which prohibit the use of or
disclosure of confidential information to third parties; and implementing
physical security measures designed to restrict access to such confidential
information and products. Our ability to maintain the confidentiality of our
technology is crucial to our ultimate possible commercial success. We cannot
assure you that the procedures adopted by us to protect the confidentiality of
our technology will be effective, that third parties will not gain access to our
trade secrets or disclose the technology, or that our we can meaningfully
protect our rights to our technology. Further, by seeking the aforementioned
patent protection in various countries, it is inevitable that a substantial
portion of our technology will become available to our competitors, through
publication of such patent applications.
Licence Agreements
The University of Manitoba (the "University"), Cancer Care Manitoba
(formerly the Manitoba Cancer Treatment and Research Foundation) ("Cancer
Care"), Dr. Jim Wright and Dr. Aiping Young entered into an exclusive license
agreement (the "License Agreement") with GeneSense dated June 20, 1997 pursuant
to which GeneSense was granted an exclusive world-wide license to certain patent
rights with the right to sub-license. In consideration for the exclusive license
to GeneSense of the patent rights, the University and Cancer Care are entitled
to an aggregate of 1.67% of the net sales received by GeneSense from the sale of
products or processes derived from the patent rights and 1.67% of all monies
received by GeneSense from sub-licenses of the patent rights. GeneSense is
solely responsible for the preparation, filing, prosecution and maintenance of
all patent applications and patents included in the patent rights and all
related expenses. Pursuant to the terms of the License Agreement, any and all
improvements to any of the patent rights derived in whole or in part by
GeneSense after the date of the License Agreement are not included within the
scope of the License Agreement and do not trigger any payment of royalties.
We have entered into an arrangement with Mayne Pharma Inc. to
distribute and sell Virulizin(R) in Mexico for malignant melanoma. See
"Co-Development, Marketing and Distribution."
15
In September 2003, we announced that we and our subsidiary, NuChem,
had entered into a licence agreement with Cyclacel in respect of the NuChem
Analogues. See "Principal Products--Small Molecule Therapies--Arrangements with
Cyclacel."
Regulatory Requirements
Regulation by government authorities in Canada, the United States,
Mexico and the European Union is a significant factor in the current research
and drug development activities of Lorus. In order to clinically test,
manufacture and market drug products for therapeutic use, Lorus must satisfy the
rigorous mandatory procedures and standards established by the regulatory
agencies in the countries in which it currently operates or intends to operate.
The laws of most of these countries require the licensing of
manufacturing facilities, carefully controlled research and the extensive
testing of products. Biotechnology companies must establish the safety and
efficacy of their new products in clinical trials, cGMP, and control over
marketing activities before being allowed to market their products. The safety
and efficacy of a new drug must be shown through clinical trials of the drug
carried out in accordance with the mandatory procedures and standards
established by regulatory agencies.
Regulatory compliance can take several years and can involve
substantial expenditures. There can be no assurance that difficulties or
excessive costs will not be encountered by Lorus in our efforts to secure
necessary approvals, which could delay or prevent Lorus from manufacturing or
marketing our products.
CANADA
In Canada, the manufacture and sale of new drugs are controlled by
Health Canada. New drugs must pass through a number of testing stages, including
pre-clinical testing and clinical trials. Preclinical testing involves testing
the new drug's chemistry, pharmacology and toxicology in vitro and in animals.
Successful results (that is, potentially valuable pharmacological activity
combined with an acceptable low level of toxicity) enable the manufacturer of
the new drug to file an IND submission to begin clinical trials involving
humans.
In order to study a drug in Canadian patients, an IND submission must
be filed with Health Canada. The IND submission must contain specified
information, including the results of the pre-clinical tests completed at the
time of the submission and any available information regarding use of the drug
in humans. In addition, since the method of manufacture may affect the efficacy
and safety of a new drug, information on manufacturing methods and standards and
the stability of the substance and dosage form must be presented. Production
methods and quality control procedures must be in place to ensure an acceptably
pure product, essentially free of contamination, and to ensure uniformity with
respect to all quality aspects.
Provided Health Canada does not reject an IND submission, clinical
trials can begin. Clinical trials are carried out in three phases or a
combination thereof. Phase I involves studies to evaluate toxicity in humans.
The new drug is administered to human patients who have met the clinical trial
entry criteria to determine pharmacokinetics, human tolerance and prevalence of
adverse side effects. Phases II and III involve therapeutic studies. In Phase
II, efficacy, dosage, side effects and safety are established in a small number
of patients who have the disease or disorder that the new drug is intended to
treat. In Phase III, there are controlled clinical trials in which the new drug
is administered to a large number of patients who are likely to receive benefit
from the new drug. In Phase III, the effectiveness of the new drug is compared
to that of standard accepted methods of treatment in order to provide sufficient
data for the statistical proof of safety and efficacy for the new drug.
16
If clinical studies establish that a new drug has value, the
manufacturer submits a NDS application to Health Canada for marketing approval.
The NDS contains all information known about the new drug, including the results
of pre-clinical testing and clinical trials. Information about a substance
contained in an NDS includes its proper name, its chemical name, details on its
method of manufacturing and purification and its biological, pharmacological and
toxicological properties. The NDS also provides information about the dosage
form of the new drug, including a quantitative listing of all ingredients used
in its formulation, its method of manufacture, packaging and labelling, the
results of stability tests, and its diagnostic or therapeutic claims and side
effects, as well as details of the clinical trials to support the safety and
efficacy of the new drug. All aspects of the NDS are critically reviewed by
Health Canada. If an NDS is found satisfactory, a notice of compliance is issued
permitting the new drug to be sold.
Health Canada has a policy of priority evaluation of new drug
submissions for all drugs intended for serious or life-threatening diseases for
which no drug product has received regulatory approval in Canada and for which
there is reasonable scientific evidence to indicate that the proposed new drug
is safe and may provide effective treatment.
The monitoring of a new drug does not cease once it is on the market.
For example, a manufacturer of a new drug must report any new information
received concerning serious side effects, as well as the failure of the new drug
to produce desired effects. As well, if Health Canada determines it to be in the
interest of public health, a notice of compliance for a new drug may be
suspended and the new drug may be removed from the market.
An exception to the foregoing requirements relating to the manufacture
and sale of a new drug is the limited authorization that may be available in
respect of the sale of new drugs for emergency treatment. Under the special
access program, Health Canada may authorize the sale of a quantity of a new drug
for human use to a specific practitioner for the emergency treatment of a
patient under the practitioner's care. Prior to authorization, the practitioner
must supply Health Canada with information concerning the medical emergency for
which the new drug is required, such data as is in the possession of the
practitioner with respect to the use, safety and efficacy of the new drug, the
names of the institutions at which the new drug is to be used and such other
information as may be requested by Health Canada. In addition, the practitioner
must agree to report to both the drug manufacturer and Health Canada the results
of the new drug's use in the medical emergency, including information concerning
adverse reactions, and must account to Health Canada for all quantities of the
new drug made available.
The Canadian regulatory approval requirements for new drugs outlined
above are similar to those of other major pharmaceutical markets. While the
testing carried out in Canada is often acceptable for the purposes of regulatory
submissions in other countries, supplementary testing may be requested by
individual regulatory authorities during their assessment of any submission.
There can be no assurance that the clinical testing conducted under Health
Canada authorization or the approval of regulatory authorities of other
countries will be accepted by regulatory authorities outside Canada or such
other countries.
UNITED STATES
In the United States, the manufacture and sale of new drugs are
controlled by the FDA. New drugs require FDA approval of a marketing application
(e.g. an NDA or product licence application) prior to commercial sale. To obtain
marketing approval, data from adequate and well-controlled clinical
investigations, demonstrating to the FDA's satisfaction a new drug's safety and
effectiveness for its intended use, are required. Such data are generated in
studies conducted pursuant to an IND submission, similar to that required in
Canada. As in Canada, clinical studies are characterized as Phase I, Phase II
and Phase III trials or a combination thereof. In a marketing application, the
manufacturer must also demonstrate the identity, potency, quality and purity of
the active ingredients of the new drug involved, and the stability of those
ingredients. Further, the manufacturing facilities, equipment, processes and
17
quality controls for the new drug must comply with the FDA's cGMP regulations
for drugs or biologic products both in a pre-licensing inspection before product
licensing and in subsequent periodic inspections after licensing. In the case of
a biologic product, an establishment licence must be obtained prior to marketing
and batch releasing.
A five-year period of market exclusivity for a drug comprising a New
Chemical Entity (NCE) is available to an applicant that succeeds in obtaining
FDA approval of a NCE, provided the active ingredient of the NCE has never
before been approved in a NDA. During this exclusivity period, the FDA may not
approve any abbreviated application filed by another sponsor for a generic
version of the NCE. Further, a three-year period of market exclusivity for a new
use or indication for a previously approved drug is available to an applicant
that submits new clinical studies that are essential to support the new use or
indication. During the latter period of exclusivity, the FDA may not approve an
abbreviated application filed by another sponsor for a generic version of the
product for that use or indication.
The FDA has "fast track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new drugs used
to diagnose or treat life-threatening and severely debilitating illnesses for
which no satisfactory alternative therapies exist. "Fast track" designation
affords early interaction with the FDA in terms of protocol design, and permits,
although it does not require, the FDA to issue marketing approval after
completion of early stage clinical trials (although the FDA may require
subsequent clinical trials or even post-approval efficacy studies).
MEXICO
In Mexico, the manufacture and sale of new drugs are controlled by the
SSA. The regulatory requirements in Mexico operate under similar regulatory
principles as other international jurisdictions.
SUMMARY
The process of completing clinical trials and obtaining regulatory
approval for a new drug takes a number of years and require the expenditure of
substantial resources. Once a new drug or product licence application is
submitted, there can be no assurance that a regulatory agency will review and
approve the application in a timely manner. Even after initial approval has been
obtained, further studies, including post-marketing studies, may be required to
provide additional data on safety necessary to gain approval for the use of the
new drug as a treatment for clinical indications other than those for which the
new drug was initially tested. Also, regulatory agencies may require
post-marketing surveillance programs to monitor a new drug's side effects.
Results of post-marketing programs may limit or expand the further marketing of
new drugs. A serious safety or effectiveness problem involving an approved new
drug may result in a regulatory agency requiring withdrawal of the new drug from
the market and possible civil action.
In addition to the regulatory product approval framework,
biotechnology companies, including Lorus, are subject to regulation under local
provincial, state and federal law, including requirements regarding occupational
safety, laboratory practices, environmental protection and hazardous substance
control, and may be subject to other present and future local, provincial,
state, federal and foreign regulation, including possible future regulation of
the biotechnology industry.
Regulatory Strategy
Our overall regulatory strategy is to work with Health Canada, the FDA
in the United States, the EMEA in Europe, the SSA in Mexico and any other local
regulatory agencies to have drug applications approved for use of Virulizin(R)
and GTI-2040 and GTI-2501 in clinical trials (alone and/or in combination with
chemotherapeutic compounds) and subsequently for sale in international markets.
18
Where possible, we intend to take advantage of opportunities for accelerated
consideration of drugs designed to treat rare and serious or life-threatening
diseases. We also intend to pursue priority evaluation of any application for
marketing approval filed in Canada, the United States, the European Economic
Community or Mexico. We also intend to file additional drug applications in
other markets where commercial opportunities exist. We cannot assure you that we
will be able to pursue these opportunities successfully, if at all.
Co-Development, Marketing and Distribution
Our objective is to maximize the therapeutic value and potential
commercial success of Virulizin(R), and our antisense technology. In the near
term, we intend to pursue research and early clinical development with our own
funds. In our efforts to obtain the greatest return on our investment in each
drug candidate, we separately evaluate the merits of each candidate throughout
the clinical trial process and will consider commercialization opportunities
when appropriate. We intend to partner with pharmaceutical companies for the
sales, marketing and distribution of our products.
Lorus has a variety of academic partnerships including: Hospital for
Sick Children; McGill University; Ontario Cancer Institute; US NCI; University
of Western Ontario and the University of Chicago Cancer Center.
In July 2000, we entered into a five year agreement with AVI BioPharma
Inc. ("AVI") Portland, Oregon, U.S.A. (a leading U.S. company in the area of
antisense technology) for the evaluation and co-development of antisense drug
therapies for cancer and infectious diseases. Under the terms of the agreement,
Lorus and AVI will each retain an ownership interest in any jointly developed
compound. Drugs discovered together may also be developed independently with
royalty payments to the other party.
In September 2001, Lorus executed a licence and distribution agreement
with Mayne Pharma Inc. (formerly Faulding Canada Inc.) Mayne Pharma will
distribute and sell Virulizin(R) in Mexico for the treatment of malignant
melanoma. Under the terms of the agreement, Mayne Pharma exercised its option to
obtain the rights to distribute and sell Virulizin(R) in Brazil. In November,
2002, we announced that Mayne Pharma exercised its option to acquire the
distribution rights for Virulizin (R) in Argentina for the treatment of
malignant melanoma. The distribution agreement will include the same terms as
the exclusive seven-year distribution agreement signed between Lorus and Mayne
Pharma for the Mexican market. Lorus will continue to arrange for the
manufacture of Virulizin (R) and receive a royalty on sales.
In September 2003, we announced that we and our subsidiary, NuChem,
had entered into a licence agreement with Cyclacel in respect of the NuChem
Analogues. See "Principal Products--Small Molecule Therapies-- Arrangements with
Cyclacel."
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. There are many companies in
both these industries that are focusing their efforts on activities similar to
those of Lorus. Some of these are companies with established positions in the
pharmaceutical industry and may have substantially more financial and technical
resources, more extensive research and development capabilities, and greater
marketing, distribution, production and human resources than Lorus. In addition,
we may face competition from other companies for opportunities to enter into
collaborative agreements with biotechnology and pharmaceutical companies and
academic institutions. Many of these other companies are not solely focused on
cancer, as is the mission of Lorus' drug development. Lorus specializes in the
development of drugs that will help manage cancer. With products in late stage
pre-clinical through to Phase III development, spanning three different platform
technologies focused on cancer, we believe it has multiple opportunities for
success.
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Products that may compete with Lorus' include chemotherapeutic agents,
monoclonal antibodies, antisense therapies and immunotherapies with novel
mechanisms of action. These are drugs that are delivered by specific means and
are targeting cancers with large disease populations. We expect to experience
competition from established and emerging pharmaceutical and biotechnology
companies that have other forms of treatment for the cancers targeted by Lorus.
There are many drugs currently in development for the treatment of cancer that
employ a number of novel approaches for attacking these cancers. Cancer is a
complex disease with more than 100 indications requiring drugs for treatment.
The drugs in competition with Lorus' drugs have specific targets for attacking
the disease, targets which are not necessarily the same as Lorus'. These
competitive drugs therefore could potentially also be used together in
combination therapies with Lorus' drugs to manage the disease.
Human Resources
As at October 17, 2003, Lorus had a staff of over 50 full-time persons
and two part-time persons, who are involved in research and drug development,
and administration activities. Of Lorus' employees, eleven are medical doctors
and/or Ph.D.s. We have a Medical and Scientific Advisory Board comprised of
eight members who are each medical doctors or Ph.D.s. To encourage a focus on
achieving long term performance, employees and members of the board of directors
have the ability to acquire an ownership interest in our Company through our
Stock Option Plan.
Properties
Lorus' head office, which occupies 20,500 square feet, is located at 2
Meridian Road, Toronto, Ontario. The premises include approximately 8,000 square
feet of laboratory and research space.
We believe that our existing facilities are adequate to meet our
requirements for the foreseeable future.
20
SELECTED AUDITED CONSOLIDATED FINANCIAL INFORMATION
The following table sets out selected consolidated financial
information which has been derived from our 2003 Financial Statements.
SELECTED AUDITED CONSOLIDATED FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
Year Ended May 31
(Amounts in 000's except for per common share data) ----------------------------------
(Canadian Dollars) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
REVENUES $ 66 $ - $ -
- ------------------------------------------------------------------------------------------------------
66 - -
- ------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 55 - -
Research and development 12,550 8,659 9,797
General and administrative 4,290 4,867 6,414
Depreciation and amortization 960 1,956 1,903
- ------------------------------------------------------------------------------------------------------
OPERATING LOSS 17,789 15,482 18,114
- ------------------------------------------------------------------------------------------------------
INTEREST AND OTHER INCOME (1,155) (1,995) (2,901)
- ------------------------------------------------------------------------------------------------------
LOSS FOR THE PERIOD 16,634 13,487 15,213
Deficit, beginning of period 74,869 61,382 46,169
- ------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD $ 91,503 $ 74,869 $ 61,382
======================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ 0.12 $ 0.09 $ 0.11
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED IN THE
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE (000'S) 144,590 143,480 140,776
SELECTED CONSOLIDATED QUARTERLY RESULTS (UNAUDITED)
(000's of Canadian Dollars except per common share amounts)
May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31,
2003 2003 2002 2002 2002 2002 2001 2001
------- -------- -------- -------- ------- -------- -------- --------
Loss for the quarter $4,787 $3,802 $3,969 $4,076 $3,720 $3,028 $3,683 $3,056
Loss per common share for
the quarter(1) $ 0.04 $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.02 $ 0.03 $ 0.02
- ----------
(1) Loss per common share for the quarter based on weighted average number of
common shares outstanding for the quarter.
21
CONSOLIDATED BALANCE SHEET DATA
(Thousands of Canadian Dollars) May 31, 2003 (audited) May 31, 2002 (audited) May 31, 2001 (audited)
- ------------------------------- ---------------------- ---------------------- ----------------------
Cash and cash equivalents and short-term investments
$25,124 $37,822 $48,818
Total assets 34,255 47,572 61,807
Total liabilities 5,360 3,432 5,865
Accumulated deficit 91,503 74,869 61,382
Shareholders' equity 28,895 44,140 55,942
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS
The MD&A is incorporated herein by reference.
SHARE CAPITAL AND MARKET FOR SECURITIES
In September 2002, Lorus filed a base shelf prospectus in the Province
of Ontario qualifying the distribution of common shares up to an aggregate
offering price of $20 million over a 25 month period. To date, we have not
issued any securities under this prospectus.
On June 11, 2003, Lorus completed an offering of 22.8 million units
priced at $1.25 per unit, for gross proceeds of $28.5 million. In addition, the
agents involved exercised their over-allotment option in full and purchased an
additional 3.42 million units for additional proceeds of $4.275 million. Each
unit consisted of one common share and one-half warrant to purchase one common
share. Lorus filed a final short form prospectus with securities commissions and
similar regulatory authorities in all Canadian provinces to qualify the issuance
of the common shares. The successful completion of this offering provided us
with approximately net $30 million in new capital.
Market for Securities
Our common shares are currently listed on The Toronto Stock Exchange
under the symbol "LOR".
Our common shares are also traded in the United States on the
over-the-counter bulletin board under the symbol "LORFF".
Dividends
We have never paid dividends on our common shares and we do not expect
to have the ability to pay dividends in the near future. If we generate earnings
in the future, we expect that they will be retained to finance further growth
and, when appropriate, retire debt. The directors of Lorus will determine if and
when dividends should be declared and paid in the future based on Lorus'
financial position at the relevant time.
22
DIRECTORS AND OFFICERS
The following table and notes thereto provide the name, municipality
of residence, positions with Lorus, term of office and principal occupation of
each person who serves as a director or officer of Lorus as at the date hereof.
Officers serve at the discretion of the Board of Directors.
Each director has been elected or appointed to serve until the next
annual meeting or until a successor is elected or appointed. We have an Audit
Committee, an Environmental Committee, a Corporate Governance Committee and a
Human Resources and Compensation Committee and the members of each such
committee are shown below. As at October 1, 2003, the directors and executive
officers of Lorus, as a group, beneficially owned, directly or indirectly, or
exercised control over 8,994,068 or approximately 5% of the common shares.
NAME AND MUNICIPALITY DIRECTOR OR
OF RESIDENCE POSITION OFFICER SINCE
- ------------------------------ -------- -------------
ROBERT L. CAPIZZI(2) Director January 2003
Philadelphia, Pennsylvania
SUZANNE CADDEN Vice President, Clinical and Regulatory Affairs July 2001
Mississauga, Ontario
KEVIN BUCHI(1) Director January 2003
West Chester, Pennsylvania
SHANE A. ELLIS Corporate Secretary, Vice President of Legal April 1998
Toronto, Ontario Affairs
PING WEI Comptroller and Acting Chief Financial Officer January 2003
Markham, Ontario
DONALD W. PATERSON(1) Director July 1991
Toronto, Ontario
ELLY REISMAN Director November 1999
Toronto, Ontario
ALAN STEIGROD(2) Director May 2001
Newport Beach, California
GRAHAM STRACHAN(1)(2)(3)(4) Chair, Director May 2001
Etobicoke, Ontario
DR. JIM WRIGHT Chief Executive Officer, Director October 1999
Aurora, Ontario
DR. AIPING YOUNG(4) Senior Vice President, Research and Development October 1999
Toronto, Ontario and Chief Technical Officer
(1) Member of Audit Committee.
(2) Member of the Human Resources and Compensation Committee.
(3) Member of the Corporate Governance Committee
(4) Member of Environmental Committee.
The principal occupation and employment of each of the foregoing
persons for the past five years is set forth below:
KEVIN BUCHI: Mr. Buchi is a senior vice president and chief financial officer of
Cephalon Inc., an international biopharmaceutical company. Mr. Buchi is
responsible for finance, accounting, business development and information
systems and has been involved in raising significant financing for Cephalon Inc.
He is a certified public accountant and has received a master's degree in
management from the J. L. Kellogg Graduate School of Management at Northwestern
University.
SUZANNE CADDEN: Ms. Cadden joined Lorus in February 2001 as Director, Regulatory
Affairs and Compliance. Prior to joining Lorus, Ms. Cadden was a Senior Director
and Director of Regulatory
23
Affairs and Compliance with Glaxo Wellcome Canada from 1996 to 2000. Prior to
August 1996, Ms. Cadden was a Director of Regulatory Affairs and
Pharmacoeconomics with CIBA-Geigy Canada.
ROBERT L. CAPIZZI, M.D.: Dr. Capizzi is president of Capizzi Clinical Resources
Inc., a company that specializes in pharmaceutical drug development and
regulatory affairs. From 1996 to 2001, Dr. Capizzi served as professor of
medicine and pharmacology, and as the Magee professor of medicine and chairman
of the department of medicine at the Thomas Jefferson University in
Philadelphia, PA.
SHANE A. ELLIS: From 1994 to 1997, Mr. Ellis lectured in business law at the
School of Business Management, Ryerson Polytechnical University. From 1996 to
1998, Mr. Ellis acted as counsel for the Bennett & Wright Group of Companies.
PING WEI: Prior to joining Lorus in April 2001, Ms. Wei was a Senior Staff
Accountant with Deloitte & Touche. Prior to moving to Canada, she worked for
Arthur Andersen in the Beijing office.
DONALD W. PATERSON: Mr. Paterson is President of Cavandale Corporation, a
corporation principally engaged in providing strategic corporate consulting to
emerging growth companies within the technology industry. Prior to founding
Cavandale Corporation, Mr. Paterson was a Director and Vice-President of Wood
Gundy Inc., a Canadian investment bank, where he was directly involved in
leading the firm's activities in financing Canadian and international high
technology companies.
ELLY REISMAN: Mr. Reisman is the President and Chief Executive Officer of Great
Gulf Group, a real estate company. Mr. Reisman has held that position for more
than the last five years.
ALAN STEIGROD: Mr. Steigrod is Managing Director of Newport Healthcare Ventures,
a consulting firm for the healthcare industry, located in Newport Beach,
California. Mr. Steigrod has held that position for more than the last five
years.
GRAHAM STRACHAN (CHAIR): Mr. Strachan is President of GLS Business Development
Inc. a life-science consulting firm, located in Etobicoke, Ontario. Prior to
1999, Mr. Strachan was President, Chief Executive Officer and Director of
Allelix Biopharmaceuticals Inc. which he co-founded. Mr. Strachan has been
active as a board member and chair of several life science organizations
including the Biotechnology Human Resource Council, the National Biotechnology
Advisory Committee, the Industrial Biotechnology Association of Canada and BIO.
DR. JIM WRIGHT: Dr. Wright's present principal occupation is Chief Executive
Officer of Lorus. Prior to October 1, 2001, Dr. Wright was President of Lorus, a
position he held since October 29, 1999. Prior to October 29, 1999, Dr. Wright
was President and Chief Scientific Officer of GeneSense and a member of the
board of directors of GeneSense. He also served as Chairman of the Board. Prior
to September 1998, Dr. Wright was Professor of Microbiology, Professor of
Biochemistry and Molecular Biology, and Adjunct Professor of Internal Medicine
at the University of Manitoba, Senior Scientist and Associate Director of the
Manitoba Institute of Cell Biology and Terry Fox Senior Scientist of the
National Cancer Institute of Canada.
DR. AIPING YOUNG: Prior to June 1996, Dr. Young was Senior Scientist, Group
Leader and Medical and Scientific Advisor for Pias Corporation in Japan. From
1996 to 1999, Dr. Young was Vice President of Research and Development, and a
member of the Board of Directors for GeneSense Technologies Inc. She has also
been an Adjunct Scientist at the Manitoba Institute of Cell Biology at the
Manitoba Cancer Foundation.
24
MEDICAL AND SCIENTIFIC ADVISORY BOARD
Lorus has a Medical and Scientific Advisory Board ("MSAB") comprised
of certain medical and scientific experts whom we believe will enhance our
capabilities. Members of the MSAB meet periodically to review the progress of
Lorus' research and development activities and the results of ongoing clinical
trials. The MSAB also advises Lorus generally as to specific research programs,
and as to advances in biotechnology, immunology and other areas of scientific
expertise relevant to the further development of Lorus' technologies.
As at the date hereof, the members of the MSAB were:
DR. DONALD P. BRAUN, PH.D.: Dr. Braun is a Professor, Department of Surgery at
the Medical College of Ohio in Toledo, Ohio, and Administrative Director of the
Cancer Institute. Dr. Braun is a member of the Scientific Advisory Committee on
Immunology of the American Cancer Society and is Chair of Lorus' MSAB.
DR. GREGORY CURT, M.D.: Dr. Curt is a Clinical Director of the NCI in Bethesda,
Maryland. He received his M.D. with Distinction in Research from the University
of Rochester School of Medicine in 1977. After completing his training in
Internal Medicine at Harvard, he came to the NCI for subspecialty training in
Medical Oncology.
DR. JAIME G. DE LA GARZA SALAZAR, M.D.: Dr. de la Garza, a member of the Mayo
Graduate School of Medicine, has been the Director General of the National
Cancer Institute of Mexico since 1993. He is also the President of the Mexican
Oncology Board. Prior to his appointment as Director, Dr. de la Garza was
Associate Director in Clinical Research at the NCI.
DR. ROBERT KERBEL, PH.D.: Dr. Kerbel obtained his Ph.D. in microbiology and
immunology from Queen's University in 1972. Dr. Kerbel is currently the Director
of Biological Sciences and the Division of Cancer Biology Research at the
Sunnybrook Health Science Centre in Toronto and is also the John & Elizabeth
Tory Professor of Experimental Oncology at the University of Toronto. He is a
member of the editorial board of many international scientific journals and is
editor-in-chief of Cancer Metastatis Review.
DR. BISHNU D. SANWAL, PH.D., D.SC., F.R.S.C.: Dr. Sanwal is a Professor Emeritus
and former Chairman of the Department of Biochemistry at the University of
Western Ontario, London, Ontario. He has a long and distinguished career in
biological and medical research. With over 146 publications, Dr. Sanwal is a
member of or advisor to numerous scientific committees and journals such as the
editorial board of Archives of Biochemistry and Biophysics and member of the
Royal Society of London, and Fellow of the Royal Society of Canada. He received
a Ph.D. from the University of Delhi and a Doctor of Sciences from the Federal
Institute of Technology, Zurich.
DR. LESLEY SEYMOUR, MBBCH, FCP (SA): Dr. Seymour is a Co-Director of the
Investigational New Drug Program of the National Cancer Institute of Canada
Clinical Trials Group. She received her M.D. at the University of the
Witwatersrand in South Africa in 1978 and subsequently completed Specialist
training in Internal Medicine as well as Clinical Hematology and Medical
Oncology.
DR. LOUIS SIMINOVITCH, O.C., PH.D., D.SC., F.R.S.C., F.R.S.: Dr. Siminovitch is
a former founder and director of the Department of Medical Genetics, University
of Toronto, the Department of Genetics, Hospital for Sick Children, the Samuel
Lunenfeld Research Institute at Mount Sinai Hospital, former Director and
President of the National Cancer Institute of Canada and is presently on the
Scientific Advisory Board of the Canadian Medical Discoveries Fund, several
biotechnology companies and institutes. He is a founding member and former
Senior Editor of Virology, founding member and former member of the editorial
board of Cell, the editorial board of Annual Review of Genetics, founding member
25
and former Senior Editor of Molecular and Cellular Biology, former member of the
editorial board of Genetics and of the advisory board of Molecular Biology and
Medicine. Dr. Siminovitch received a Ph.D. from McGill University and was
awarded a Doctor of Science, Honoris Causa, for his distinguished scientific
research contributions from several Canadian universities: Memorial University,
McMaster University, University of Montreal, McGill University, University of
Western Ontario and University of Toronto. Dr. Siminovitch is a Companion of the
Order of Canada and was inducted into the Canadian Medical Hall of Fame in 1997.
DR. GEORGE R. STARK, PH.D., F.R.S.: Dr. Stark is the Sherwin-Page Chairman of
the Research Institute, The Cleveland Clinic Foundation, Cleveland, Ohio. He
received a Ph.D. from Columbia University and completed postdoctoral studies at
Rockefeller University. Dr. Stark has made significant contributions to the
field of molecular biology. Dr. Stark led the development of the Northern and
Western Blot techniques for analysis of specific RNAs and proteins. Much of his
work has focused on the process of gene amplification in mammalian cells,
leading to an appreciation both of the mechanisms that generate amplified
structures in cell lines and tumor cells and the regulatory processes that
prevent amplification from occurring in normal cells. Very recent work has led
to the discovery of a new signal pathway that regulates gene expression in
cancer cells. A former Professor of Biochemistry at Stanford University, Dr.
Stark moved to London as the Associate Director of Research at the Imperial
Cancer Research Fund in London, England (1983-1992). Dr. Stark received the H.
A. Sober award of the American Society of Biological Chemists in 1986, was
elected to the U.S.A. National Academy of Science in 1986 and to the Fellowship
of the Royal Society in Britain in 1990.
ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of Lorus' securities, options to purchase
securities and interest of insiders in material transactions, where applicable,
is contained in the Circular. Additional financial information is provided in
the 2003 Financial Statements.
Copies of
(a) the Circular;
(b) the 2003 Financial Statements and our most recent unaudited
financial statements that have been filed, if any, for any period
subsequent to May 31, 2003;
(c) this Annual Information Form and any document or the pertinent
pages of any document incorporated by reference in this Annual
Information Form; and
(d) when the securities of Lorus are in the course of a distribution
pursuant to a short form prospectus or a preliminary short form
prospectus, one copy of any other documents that are incorporated
by reference into the short form prospectus or preliminary short
form prospectus otherwise not referred to herein,
may be obtained upon request from the Corporate Secretary of Lorus, 2
Meridian Road, Toronto Ontario M9W 4Z7 Canada. If the securities of Lorus
are in the course of a distribution pursuant to a short form prospectus or
a preliminary short from prospectus, copies of the foregoing documents are
available free of charge. At all other times, a reasonable fee may be
charged if the request for copies is made by a person who is not a security
holder of Lorus.
26
GLOSSARY
The following is a glossary of terms that are used in this Annual
Information Form:
ACTINIC KERATOSIS: a condition that arises on the skin's surface. It
can be the first step in the development of skin
cancer and therefore is a precursor of cancer, or
a precancer.
ANALOGUE: a chemical derivative or variation of a parent
molecule
ANTI-ANGIOGENIC: preventing blood vessel formation
ANTI-METASTATIC the ability to inhibit the movement of tumor cells
from a primary/original site to other organs in
the body
ANTI-PROLIFERATIVE: preventing cancer cell division
APOPTOSIS: programmed cell death
BCD: Bureau of Control of Drugs, the regulatory agency
controlling pharmaceutical drugs in Mexico
BIOLOGIC RESPONSE MODIFIER a substance which stimulates, modifies or enhances
OR BRM: the body's response, including the response of the
body's immune and other protective cellular and
molecular systems, to certain diseases
CARCINOMA: any cancerous tumor that starts with the cells
that cover the inner and outer body surfaces
CLINICAL TRIALS: the investigational use of a new drug in humans:
Phase I clinical trials test a drug for safety,
Phase II clinical trials test a drug for efficacy
and safety in a relatively small sample of
patients, and Phase III clinical trials test the
drug for efficacy in larger numbers of patients
and compares the drug with conventional therapies
cGMP: current good manufacturing practices, as mandated
from time to time by Health Canada and the FDA
CLT: Clotrimazole
CYTOKINE: a generic term for a non-antibody protein released
by a cell population (e.g., activated macrophages)
of the immune system on contact with chemical or
biological stimuli
CYTOTOXIC: pertaining to the destruction of cells
DEOXYRIBONUCLEIC ACID (DNA): DNA is the carrier of genetic information which
exists in all cells of the body. The building
blocks of DNA are called nucleotides
EFFICACY: the ability of a drug to produce a desired result
27
EMEA: European Medicine Evaluation Agency
FDA: Food and Drug Administration, the government
agency which regulates the use and sale of
diagnostic and therapeutic drug products in the
United States
GENE EXPRESSION: the synthesis of specific proteins on the basis of
inherited or acquired genetic information
GENESENSE: GeneSense Technologies Inc., a subsidiary of the
Company
IMMUNE SYSTEM: the totality of organs and cells involved in the
body's immunologic response to foreign antigens
and malignant tissue
IND: investigational new drug
IN VITRO: in the test tube; referring to chemical reactions,
fermentation, etc., occurring therein e.g. in
cell-free extracts
IN VIVO: in the living body; referring to chemical
processes occurring within cells, etc., as
distinguished from those occurring in cell-free
extracts (in vitro)
LD50: the measure (quantity) of a drug that, when
administered to experimental animals in acute
toxicity studies, is lethal to 50 percent of such
animals
MACROPHAGE: a large scavenger white blood cell that engulfs
and digests invading micro-organisms and cell
debris, and also participates in many complex
immunologic processes
MALIGNANT/MALIGNANCY: describes a tumor that is cancerous. Two important
qualities of malignancies are the tendency to
invade surrounding tissues and to break off and
spread elsewhere (metastasis)
MAP KINASE PATHWAY: the pathway of mitogenic signal transduction
through the cascade of mitogen-activated protein
(MAP) kinases which ultimately lead to alteration
in regulatory events such as cell proliferation,
differentiation and apoptosis.
METABOLISM: the overall biochemical reactions that take place
in a living organism including the building up of
complex molecules or breakdown of molecules to
provide energy
METASTASIS: the process by which tumor cells are spread to
other parts of the body
mRNA: messenger, or mRNA, is a copy of the information
carried by a gene on the DNA. The role of mRNA is
to move the information contained in DNA to the
translation machinery.
NDA: new drug application, the application to obtain
marketing approval filed with the FDA or BCD after
completion of human clinical trials
NDS: new drug submission, the application to obtain
marketing approval filed with Health Canada after
completion of human clinical trials
28
NUCHEM: NuChem Pharmaceuticals Inc., a subsidiary of the
Company
NUCHEM ANALOGUES: analogues of CLT licensed by the Company for
anti-cancer indications
NUCLEIC ACID: DNA and RNA, each of which are formed by the
combination of nucleotides; it is found in all
living cells and contains the genetic code
required to transfer genetic information from one
generation to the next
NUCLEOTIDE: a compound consisting of a purine or pyrimidine
base, a pentose sugar and a phosphoric acid; they
are the building blocks from which nucleic acids
(DNA or RNA) are constructed
OLIGONUCLEOTIDES: oligonucleotides are short chains of nucleotides,
which are the building blocks of DNA and RNA
PHARMACOKINETICS: the action of drugs in the body over a period of
time, including the process of absorption,
distribution, localization in tissues,
biotransformation and excretion
PRE-CLINICAL TESTING: testing that is conducted in the laboratory
(chemistry and pharmacology) and with animals to
help determine a product's chemical,
pharmacological and pharmaceutical characteristics
(including mechanism of action), toxicity,
efficacy and side effects
PROTEINS: large molecules composed of long chains of
sub-units of amino acids
R1 AND R2: components of ribonucleotide reductase
RIBONUCLEIC ACID (RNA): a nucleic acid found in both the nucleus and the
cytoplasm of all cells. It carries genetic
information from the nucleus to the cytoplasm,
where it also reacts as a template in association
with ribosomes to synthesize proteins
SCID: severe combined immunodeficiency disease
SQUAMOUS CELL CARCINOMA: second most common skin cancer
SSA: Secretaria de Salud (the Ministry of Health for
Mexico)
STAGE IV CANCER: distant metastatic cancer spread
TOXICITY: a condition that results from exposure to a
substance at levels causing deleterious side
effects which may be harmful to an organism
TUMOR: an abnormal swelling or lump in the body caused by
the growth of new tissues which differ in
structure from the part of the body in which they
are growing. A tumor may be benign or malignant
TUMOR NECROSIS: tumor deterioration and death
XENOGRAFT: an implant of a foreign substance
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the audited annual
consolidated financial statements for the year ended May 31, 2003 and the
accompanying notes (the "Financial Statements") set forth elsewhere in this
report. The Financial Statements, and all financial information discussed below,
has been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). Significant differences between Canadian and United States
GAAP are identified in note 14 to the Financial Statements. All amounts are
expressed in Canadian dollars unless otherwise noted.
OVERVIEW
Lorus Therapeutics Inc. ("Lorus" or the "Company") is a life sciences company
focused on developing effective anti-cancer therapies with low toxicity. With
products from preclinical through Phase III trials, and a product approved in
Mexico for malignant melanoma, Lorus believes that it has established a diverse
anti-cancer product pipeline, supported by a growing intellectual property
portfolio.
The success of Lorus depends on the efficacy and safety of its products in
clinical trials, obtaining the necessary regulatory approvals to market its
products and maintaining sufficient levels of funding through public and/or
private financing. Lorus has not commercially marketed any product other than
Virulizin(R), which has been approved for sale and is being sold in the private
market in Mexico.
The Company believes that the treatment and management of cancer will continue
to be addressed through combinations of different therapies. Many cancer drugs
currently approved for use are very toxic with severe side effects. Lorus
believes that a product development plan based on effective drugs with lower
toxicity and fewer side effects could have broad application in cancer treatment
while improving the quality of life of a patient with cancer.
Lorus' strategy is to continue development of cancer drug candidates using
several therapeutic approaches. Each therapeutic approach is dependent on
different technologies, which mitigates the development risks associated with a
single technology platform. Lorus separately evaluates the merits of each
candidate throughout the clinical trial process and considers commercialization
where appropriate. Lorus' most advanced anticancer drugs in its pipeline, each
of which flow from different platform technologies, are: Immunotherapeutics
(Virulizin(R)); Antisense (GTI compounds); and small molecule or
Chemotherapeutics (NuChem compounds).
CRITICAL ACCOUNTING POLICIES
The Company periodically reviews its financial reporting and disclosure
practices and accounting policies to ensure that they provide accurate and
transparent information relative to the current economic and business
environment. As part of this process, the
30
Company has reviewed its selection, application and communication of critical
accounting polices and financial disclosures. We have determined that our
critical accounting policy relates to our accounting for drug development costs.
Other important accounting polices are described in Note 2 of the Financial
Statements.
DRUG DEVELOPMENT COSTS
The Company incurs costs related to the research and development of
pharmaceutical products and technologies for the management of cancer. These
costs include internal and external costs for pre-clinical and clinical trials,
drug costs, regulatory compliance costs and patent application costs. All
research costs are expensed as incurred as required under GAAP. Development
costs, including the cost of drugs for use in clinical trials, are expensed as
incurred unless they meet the criteria under GAAP for deferral and amortization.
The Company continually assesses its activities to determine when, if ever,
development cost may qualify for capitalization. By expensing the research and
development costs as required under GAAP, the value of the product portfolio is
not reflected on the Company's consolidated balance sheet of the Financial
Statements.
RESULTS OF OPERATIONS
REVENUES
During 2003, the Company began shipping nominal volumes of Virulizin(R) to its
distributor in the Mexican market. The Company recorded product revenue from the
sale of Virulizin(R) in Mexico of $66 thousand in 2003 as compared to nil in
both 2002 and 2001. Product revenue from the sale of Virulizin(R) in Mexico is
not expected to be material in 2004. The Company does not anticipate product
revenue in 2004 from any of its other anticancer drugs currently under
development.
RESEARCH AND DEVELOPMENT
Research and development expenditures totaled $12.6 million in 2003 compared to
$8.7 million in 2002 and $9.8 million in 2001. The increase in 2003 from 2002 is
mainly attributable to (i) the expansion of the pivotal phase III Virulizin
trial to over 50 North American and Latin American sites; (ii) the expansion of
the phase II GTI-2040 combination chemotherapy trial to more than 8 major
oncology centers in the US; and (iii) the preparation for the National Cancer
Institute sponsored GTI-2040 phase II trial programs. Research and development
costs in 2001 were higher than 2002 primarily due to the significant amount of
expenses for antisense drug purchase in 2001, and the drugs were used in
research and development activities in fiscal 2002 and 2003. Excluding the costs
related to the 2001 drug purchase, research and development expenses in 2002
would have been higher than in 2001 due to the expansion of our clinical trial
programs in 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses totaled $4.3 million in 2003 compared to
$4.9 million in 2002 and $6.4 million in 2001. The decrease in 2003 compared to
2002 resulted mainly from lower legal and advisory service fees. The decrease in
2002 expenses over expenses in 2001 was due mainly to lower spending on patent
fees and
31
advisory services as well as lower recruiting costs, since the Company hired
several executives in 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses totaled $1.0 million in 2003 compared to
$2.0 million in 2002 and $1.9 million in 2001. The decrease in 2003 over 2002
related primarily to the adoption of the new accounting pronouncement for
goodwill and other intangible assets whereby the Company ceased amortizing
goodwill on June 1, 2002 (see "Significant Accounting Policies" in the notes to
the Financial Statements). Amortization of goodwill totaled $1.5 million in each
of 2002 and 2001. Amortization of stock-based compensation in 2003 totaled $0.7
million as compared to $0.3 million in 2002 and $0.3 million in 2001. The
increase is due primarily to the increased use of performance-based options as
an employee compensation tool for this period.
INTEREST AND OTHER INCOME
Interest income totaled $1.2 million in 2003 compared to $2.0 million in 2002
and $2.9 million in 2001. The continued decrease in interest income was due to
lower cash and short-term investment balances in each successive year and the
general decline in market interest rates.
LOSS FOR THE PERIOD
The loss for the year totaled $16.6 million or $0.12 per share in 2003 compared
to $13.5 million or $0.09 per share in 2002 and $15.2 million or $0.11 per share
in 2001. The increase in net loss in 2003 compared to 2002 relates primarily to
increased clinical trial activities, which was partially offset by lower
administrative costs and the discontinuance of amortization of goodwill in
accordance with the adoption of the new CICA accounting pronouncement described
above under "Depreciation and Amortization". On a comparative basis, the loss
for the year ended May 31, 2002 and 2001 would have been $12.0 million and $13.7
million or $0.08 per share and $ 0.10 per share respectively after adjustment to
remove the amortization of goodwill. The decrease in 2002 from 2001 was
primarily due to reduced spending on general and administrative expenses and net
spending reductions on research and development activities due to lower drug
purchases partially offset by lower interest income.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Lorus has financed its operations and technology
acquisitions primarily from equity financing, the exercise of warrants and stock
options, and interest income on funds held for future investment. The Company
believes that its available cash, cash equivalents and short-term investments,
and the interest earned thereon, should be sufficient to finance its operations
and capital needs for at least the next twelve months.
FINANCING
In 2003, Lorus issued common shares on the exercise of stock options for
proceeds of
32
$0.7 million. In 2002, Lorus issued common shares on the exercise of stock
options and warrants for proceeds of $1.4 million. In 2001, Lorus issued common
shares on the exercise of warrants and stock options, and under the alternate
compensation plan in the aggregate amount of $2.1 million.
Subsequent to the 2003 fiscal year end on June 11, 2003, Lorus raised net
proceeds of $29.9 million by way of a public offering of units at a price of
$1.25 per unit, each unit consisting of one common share and one-half of one
purchase warrant.
OPERATING CASH REQUIREMENTS
Lorus' cash used in operating activities totaled $11.9 million in 2003 compared
to $11.9 million in 2002 and $9.7 million in 2001. The cash used in operating
activities in 2003 was comparable with that experienced in 2002 despite a higher
net loss in 2003 due primarily to changes in the timing of the payment of
accounts payable and accrued liabilities. The cash used in operating activities
increased in 2002 over 2001 mainly due to changes in the timing of the payment
of accounts payable, which was partially offset by reduced expenditures in
operating activities.
The Company's cash used in operating activities is expected to increase in 2004
due to increased drug development activities with the existing clinical
programs, the newly announced GTI-2501 phase II clinical trial for patients with
prostate cancer and the preparation for the New Drug Application (NDA) for
Virulizin(R) in the US.
CASH POSITION
At May 31, 2003, Lorus had cash and cash equivalents and short-term investments
totaling $25.1 million compared to $37.8 million at the end of 2002. The Company
invests in highly rated and liquid debt instruments. Investment decisions are
made in accordance with an established investment policy administered by senior
management and overseen by the Company's board of directors.
Working capital (representing primarily cash and cash equivalents and short-term
investments) at May 31, 2003 was $20.9 million as compared to $35.6 million in
2002. Subsequent to the year end, as a result of the public offering referred to
above, cash and short-term investments increased by $29.9 million (gross
proceeds of offering net of issuance costs). Had the transaction closed on May
31, 2003, the Company's cash and cash equivalent and short-term investments
balance would have been $55.5 million.
The Company does not expect to generate a positive cash flow from operations for
several years due to substantial additional research and development costs,
including costs related to drug discovery, preclinical testing, clinical trials,
manufacturing costs and operating expenses associated with supporting these
activities. Negative cash flow will continue until such time, if ever, as the
company receives regulatory approval to commercialize products under development
and revenue from such products exceeds expenses.
The Company may seek to access the public or private equity markets from time to
time, even if it does not have an immediate need for additional capital at that
time.
33
Lorus intends to use its resources to fund its existing drug development
programs and develop new programs from its portfolio of preclinical research
technologies. The amounts actually expended for research and drug development
activities and the timing of such expenditures will depend on many factors,
including the progress of the Company's research and drug development programs,
the results of preclinical and clinical trials, the timing of regulatory
submissions and approvals, the impact of any internally developed licenses or
acquired technologies, the impact from technological advances, determinations as
to the commercial potential of the Company's compounds and the timing and
development status of competitive products.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for each of the eight most recent quarters that, in management's
opinion, have been prepared on a basis consistent with the audited consolidated
financial statements contained elsewhere in this annual report and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information presented. These operating results are not
necessarily indicative of results for any future period. Readers should not rely
on them to predict the future performance of the Company.
FISCAL 2003
- ---------------------------------------------------------------------------------------------------------------
Quarter Ended
- ---------------------------------------------------------------------------------------------------------------
AUG 31 NOV 30 FEB 28 MAY 31
2002 2002 2003 2003
(in thousands of dollars, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
REVENUES
Product Sales $ - $ - $ 27 $ 39
OPERATING EXPENSES
Cost of sales - - 27 28
Research and development 3,047 3,323 2,876 3,304
General and administrative 1,304 796 960 1,230
Depreciation and amortization 95 164 224 477
-------------------------------------------------
Operating loss 4,446 4,283 4,060 5,000
Interest and other income (370) (314) (258) (213)
-------------------------------------------------
Loss for the period $4,076 $3,969 $3,802 $4,787
Basic and fully diluted loss
per common share $ 0.03 $ 0.03 $ 0.02 $ 0.04
- ---------------------------------------------------------------------------------------------------------------
34
FISCAL 2002
- ----------------------------------------------------------------------------------------------------------
Quarter Ended
- ----------------------------------------------------------------------------------------------------------
AUG 31 NOV 30 FEB 28 MAY 31
2001 2001 2002 2002
(in thousands of dollars, except per share amounts)
- ----------------------------------------------------------------------------------------------------------
REVENUES
Product Sales $ - $ - $ - $ -
OPERATING EXPENSES
Cost of sales - - - -
Research and development 2,142 2,093 1,872 2,552
General and administrative 1,062 1,583 1,209 1,013
Depreciation and amortization 455 567 458 476
--------------------------------------------
Operating loss 3,659 4,243 3,539 4,041
Interest and other income (603) (560) (511) (321)
--------------------------------------------
Loss for the period $3,056 $3,683 $3,028 $3,720
Basic and fully diluted loss
per common share $ 0.02 $ 0.03 $ 0.02 $ 0.02
- ----------------------------------------------------------------------------------------------------------
RISKS AND UNCERTAINTIES
Lorus has not produced or commercially marketed any product other than
Virulizin(R), which has been approved for sale and is being sold in the private
market in Mexico. Although Lorus has commenced commercial sale of Virulizin(R),
there can be no assurance that the company will realize future revenues from the
product. In addition, there can be no assurance that the company will ever
realize revenues from any of its products in development, or that the Company
will ever be profitable.
All of Lorus' products are in various stages of development. There can be no
assurance that Lorus will have funds available to permit the successful
commercialization of its products. The company's funding needs may vary
depending on many factors including: the progress and number of research and
drug development programs; costs associated with clinical trials and the
regulatory process; costs related to maintaining drug manufacturing sources;
costs of prosecuting or enforcing patent claims and other intellectual property
rights; collaborative and license agreements with third parties; and
opportunities to in-license or acquire new products.
In order to commercialize Lorus' products, Lorus must obtain regulatory
approvals. Regulatory approvals can take a number of years and involve
substantial expenditures. There can be no assurance that the Company will ever
obtain necessary approvals or licenses for any of its products; that the Company
will not encounter difficulties or
35
excessive costs in the efforts to secure necessary approvals and licenses; or
that the Company will be able to obtain sufficient funds to meet the necessary
expenditures associated with obtaining regulatory approvals.
Lorus relies upon third parties to provide certain key services, including
contract manufacturers to manufacture its products and independent investigators
and contract research organization to assist it in conducting its clinical
trails. These third parties may encounter difficulties in meeting regulatory
requirements and in maintaining quality control and quality assurance to meet
Lorus' clinical development needs. If these third party service providers are
unable to meet regulatory requirement or maintain quality control and quality
assurance, or the Company is unable to retain such suppliers or obtain new third
party suppliers, the Company may not be able to effectively conduct clinical
trials or ultimately commercialize its products.
Lorus' interest income is subject to fluctuations of interest rates in its
investment portfolio of debt securities. Investments are held to maturity and
have staggered maturities to minimize interest rate risk. There can be no
assurance that interest income fluctuations will have an adverse impact on
Lorus' financial condition.
The Company maintains its accounts in Canadian dollars, but its revenues and a
portion of its expenditures are in foreign currencies. Lorus does not currently
engage in hedging its foreign currency requirements to reduce exchange rate
risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In December of 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to the Financial Statements.
Effective January 1, 2003, the Company adopted the initial recognition and
measurement provisions of FASB Interpretation No. 45 "Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which apply on a prospective
basis to certain guarantees issued or modified after December 31, 2002. FASB
Interpretation No. 45 requires that a liability be recognized for the estimated
fair value of the guarantee at its inception. The Company has entered into
agreements that contain features which meet the definition of a guarantee under
this interpretation note as described in note 12 to the Financial Statements.
The maximum amounts from these guarantees cannot be reasonably estimated.
Historically, the Company has not made significant payments related to these
guarantees. The adoption of FASB Interpretation No. 45 did not have a material
impact on the business,
36
results of operations and financial condition of the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses an accounting research bulletin ("ARB") in respect of
the consolidation by business enterprises of variable interest entities as
defined in the interpretation. This interpretation applies immediately to
variable interests in variable interest entities created after January 31, 2003,
and to variable interests in variable interest entities obtained after January
31, 2003. This interpretation requires certain disclosures in financial
statements issued after January 31, 2003 if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the interpretation becomes effective. The application of this
interpretation will not have a material effect on the Company's financial
statements.
FORWARD LOOKING STATEMENTS
This management's discussion and analysis and other sections of the annual
report contain forward-looking statements, which are based on the Company's
current expectations and assumptions, and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
anticipated. Readers are cautioned that all forward-looking statements herein
involve risks and uncertainties, including, without limitation, changing market
conditions,our ability to obtain patent protection and protect our intellectual
property rights, commercialization limitations imposed by intellectual property
rights owned or controlled by third parties, intellectual property liability
rights and liability claims asserted against us, the successful and timely
completion of clinical studies, the impact of competitive products and pricing,
new product development, uncertainties related to the regulatory approval
process, product development delays, our ability to attract and retain business
partners and key personnel, future levels of government funding, our ability to
obtain the capital required for research, operations and marketing and other
risks detailed from time-to-time in the Company's ongoing quarterly filings,
annual information forms and annual reports. These factors should be carefully
considered and readers should not place undue reliance on our forward-looking
statements. Actual events may differ materially from our current expectations
due to risks and uncertainties. Certain of the risks and uncertainties are
discussed above and in the section entitled "Risks and Uncertainties".
37
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements and all information in this
annual report have been prepared by management and have been approved by the
Board of Directors of the Company.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and include amounts that are based on
the best estimates and judgments of management. Financial information presented
in accordance with Canadian generally accepted accounting principles elsewhere
in the annual report is consistent with that in the financial statements.
In discharging its responsibility for the integrity and fairness of the
financial statements, management maintains a system of internal controls
designed to provide reasonable assurance that transactions are authorized,
assets are safeguarded and proper records are maintained. Management believes
that the internal controls provide reasonable assurance that financial records
are reliable and form a proper basis for the preparation of the consolidated
financial statements, and that assets are properly accounted for and
safeguarded. The internal control process includes management's communication to
employees of policies that govern ethical business conduct.
The Board of Directors, through an Audit Committee, oversees management's
responsibilities for financial reporting. This committee, which consists of
three independent directors, reviews the audited consolidated financial
statements, and recommends the financial statements to the Board for approval.
Other key responsibilities of the Audit Committee include reviewing the adequacy
of the Company's existing internal controls, audit process and financial
reporting with management and the external auditors.
These financial statements have been audited by KPMG LLP, who are independent
auditors appointed by the shareholders of the Company upon the recommendation of
the Audit Committee. Their report follows. The independent auditors have free
and full access to the Audit Committee with respect to their findings concerning
the fairness of financial reporting and the adequacy of internal controls.
/s/ Jim A. Wright /s/ Ping Wei
- --------------------------------- ---------------------------------
Chief Executive Officer Acting Chief Financial Officer
June 28, 2003
38
[KPMG LOGO]
KPMG LLP
CHARTERED ACCOUNTANTS Telephone (416) 228-7000
Yonge Corporate Centre Telefax (416) 228-7123
4100 Yonge Street Suite 200 www.kpmg.ca
Toronto ON M2P 2H3
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Lorus Therapeutics Inc. as at
May 31, 2003 and 2002 and the consolidated statements of loss and deficit and
cash flows for each of the years in the three-year period ended May 31, 2003 and
the related consolidated statements of loss and deficit and cash flows for the
period from inception on September 5, 1986 to May 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2003 and
2002 and the results of its operations and its cash flows for each of the years
in the three-year period ended May 31, 2003 and for the period from inception on
September 5, 1986 to May 31, 2003 in accordance with Canadian generally accepted
accounting principles.
We did not audit the consolidated financial statements of Lorus Therapeutics
Inc. for the period from inception on September 5, 1986 to May 31, 1994. Those
consolidated financial statements were audited by other auditors who issued a
report without reservation on July 8, 1994.
/s/ KPMG LLP
- -------------------------------------
Chartered Accountants
Toronto, Canada
July 3, 2003
39
LORUS THERAPEUTICS INC.
CONSOLIDATED BALANCE SHEETS
As at May 31
(Amounts in 000's)
(Canadian Dollars) 2003 2002
- ------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 905 $ 1,165
Short-term investments 24,219 36,657
Prepaid expenses and amounts receivable 1,104 1,195
- ------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 26,228 39,017
Fixed assets (note 3) 1,507 533
Goodwill 606 606
Acquired research and development (note 4) 5,669 7,416
Deferred financing costs 245 -
- ------------------------------------------------------------------------------------
$ 34,255 $ 47,572
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,318 $ 442
Accrued liabilities 4,042 2,990
- ------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,360 3,432
SHAREHOLDERS' EQUITY
Share capital (note 5)
Common shares
Authorized: unlimited number of shares;
Issued and outstanding (000's):
May 31, 2003 - 145,285
May 31, 2002 - 144,412 120,441 119,168
Warrants - -
Deferred stock-based compensation (43) (159)
Deficit accumulated during development stage (91,503) (74,869)
- ------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 28,895 44,140
- ------------------------------------------------------------------------------------
$ 34,255 $ 47,572
====================================================================================
Commitments (note 9)
Subsequent events (note 13)
Canada and United States accounting policy differences (note 14)
See accompanying notes to consolidated financial statements
On behalf of the Board:
DON PATERSON (SIGNED) JIM A. WRIGHT (SIGNED)
- -------------------------------- -----------------------------------
DIRECTOR DIRECTOR
40
LORUS THERAPEUTICS INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
Period from
Year Ended May 31 inception
(Amounts in 000's except for per common share data) ----------------------------------- Sept. 5, 1986 to
(Canadian Dollars) 2003 2002 2001 May 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
REVENUES $ 66 $ - $ - $ 66
- -----------------------------------------------------------------------------------------------------------------------
66 - - 66
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 55 - - 55
Research and development (note 7) 12,550 8,659 9,797 59,059
General and administrative 4,290 4,867 6,414 32,878
Depreciation and amortization 960 1,956 1,903 8,361
- -----------------------------------------------------------------------------------------------------------------------
OPERATING LOSS 17,789 15,482 18,114 100,287
- -----------------------------------------------------------------------------------------------------------------------
INTEREST AND OTHER INCOME (1,155) (1,995) (2,901) (8,784)
- -----------------------------------------------------------------------------------------------------------------------
LOSS FOR THE PERIOD 16,634 13,487 15,213 91,503
Deficit, beginning of period 74,869 61,382 46,169 -
- -----------------------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD $ 91,503 $ 74,869 $ 61,382 $ 91,503
=======================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE (NOTE 2) $ 0.12 $ 0.09 $ 0.11
=======================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
USED IN THE CALCULATION OF BASIC AND DILUTED LOSS
PER SHARE 144,590 143,480 140,776
=======================================================================================================================
See accompanying notes to consolidated financial statements
41
LORUS THERAPEUTICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Year Ended May 31 inception
(Amounts in 000's) -------------------------------------------- Sept. 5, 1986 to
(Canadian Dollars) 2003 2002 2001 May 31, 2003
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period $(16,634) $(13,487) $(15,213) $(91,503)
Add items not requiring a current outlay of cash:
Depreciation and amortization 2,033 3,407 3,368 13,961
Stock-based compensation 674 296 335 1,336
Other - - - 500
Net change in non-cash working capital balances
related to operations (note 8) 2,019 (2,124) 1,848 3,349
- ---------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (11,908) (11,908) (9,662) (72,357)
=====================================================================================================================
INVESTING ACTIVITIES
Sale (purchase) of short-term investments, net 12,438 9,378 (40,376) (24,219)
Acquisition, net of cash received - - - (539)
Acquired research and development - - - (715)
Additions to fixed assets (1,260) (477) (172) (4,992)
Cash proceeds on sale of fixed assets - - - 348
- ---------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 11,178 8,901 (40,548) (30,117)
=====================================================================================================================
FINANCING ACTIVITIES
Issuance of warrants - - - 31,877
Issuance of common shares 715 1,389 2,065 71,747
Additions to deferred financing costs (245) - - (245)
- ---------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 470 1,389 2,065 103,379
=====================================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DURING THE PERIOD (260) (1,618) (48,145) 905
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,165 2,783 50,928 -
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 905 $ 1,165 $ 2,783 $ 905
=====================================================================================================================
See accompanying notes to consolidated financial statements
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2003, 2002 and 2001
1. Description of Business
Lorus Therapeutics Inc. ("Lorus" or "the Company") is a biopharmaceutical
company specializing in the research, development and commercialization of
pharmaceutical products and technologies for the management of cancer. With
products in all stages of evaluation, from pre-clinical through Phase III
trials, and a product approved in Mexico for malignant melanoma, Lorus
develops therapeutics that seek to manage cancer with efficacious low-toxic
compounds that improve patients' quality of life.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lorus, its
80% owned subsidiary NuChem Pharmaceuticals Inc. ("NuChem"), and its
wholly-owned subsidiary GeneSense Technologies Inc. ("GeneSense"). The
results of operations for acquisitions are included in these consolidated
financial statements from the date of acquisition. All significant
intercompany balances and transactions have been eliminated on
consolidation.
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada and
comply in all material respects with accounting principles generally
accepted in the United States, except as disclosed in note 14 "Canada and
United States Accounting Policy Differences."
Revenue recognition
Revenue includes product sales revenue and royalty revenue.
The Company recognizes revenue from product sales when title has passed and
collection is reasonably assured, which typically is upon delivery to the
distributor.
The Company earns royalties from its distributor. Royalties from the
distribution and licensing agreement are recognized when the amounts are
reasonably determinable and collection is reasonably assured.
Cash Equivalents and Short-Term Investments
Lorus invests in high quality government and corporate issuers with low
credit risk. Cash equivalents consist of highly liquid investments with a
maturity of three months or less at the time of purchase.
Short-term investments, which consist of fixed income securities with a
maturity of three months or more, are recorded at their accreted value as
they are held to maturity instruments.
Inventory
The Company purchases drugs for resale and for research and clinical
development. Drugs purchased for use in research and clinical development
are expensed as purchased. Drugs purchased for resale are recorded as
inventory and valued at lower of cost and net realizable value.
Fixed Assets
Fixed assets are recorded at cost. The Company provides depreciation and
amortization at rates which are expected to charge operations with the cost
of the assets over their estimated useful lives as follows:
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
Furniture and equipment straight-line over three to five years
Leasehold improvements straight-line over the lease term
---------------------------------------------------------------------------
The Company regularly reviews the carrying value of its fixed assets by
comparing the carrying amount of the assets to the expected future cash
flows to be generated by the assets. If the carrying value exceeds the
amount recoverable, a write-down is charged to the statement of operations.
Research and Development
Research costs are charged to expense as incurred. Development costs,
including the cost of drugs for use in clinical trials, are expensed as
incurred unless they meet the criteria under generally accepted accounting
principles for deferral and amortization. No development costs have been
deferred to date.
The Company capitalized the cost of acquired research and development on
the acquisitions of GeneSense and the NuChem compounds and is amortizing
these costs on a straight-line basis over seven years. Management reviews
the carrying value of acquired research and development and accounts for
any permanent impairment in value as a charge to operations in the year
incurred.
The carrying value of acquired research and development does not
necessarily reflect its present or future value. The amount recoverable is
dependent upon the continued advancement of the drugs through research,
clinical trials and ultimately to commercialization. It is not possible to
predict the outcome of future research and development programs.
The Company has not earned substantial revenues from its drug candidates
and is therefore considered to be in the development stage.
Business Combinations, Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of
net identifiable assets acquired in the GeneSense business combination, and
until June 1, 2002, was amortized on a straight-line basis over three
years. In August 2001, the CICA issued Handbook Sections 1581, "Business
Combinations", and 3062, "Goodwill and Other Intangible Assets". The new
standards require that the purchase method of accounting must be used for
business combinations and require that goodwill no longer be amortized but
instead be tested for impairment at least annually. The standards also
specify criteria that intangible assets must meet to be recognized and
reported apart from goodwill. The standards require that the value of the
shares issued in a business combination be measured using the average share
price for a reasonable period before and after the date the terms of the
acquisition are agreed to and announced. The new standards are
substantially consistent with U.S. GAAP.
The Company has adopted these new standards as of June 1, 2002 and the
Company has discontinued amortization of all existing goodwill. The Company
has also evaluated existing intangible assets, including estimates of
remaining useful lives in accordance with the provisions of the standard.
In connection with Section 3062's transitional goodwill impairment
evaluation, the Company assessed whether goodwill was impaired as of June
1, 2002. Impairment is identified by comparing the carrying amount of the
Company's reporting units with their fair values. To the extent a reporting
unit's carrying amount exceeds its fair value, the Company must perform a
second step to measure the amount of impairment in a manner similar to a
purchase price allocation. The Company completed the transitional goodwill
impairment assessment during the first quarter of 2003 and determined that
no impairment existed at the date of adoption. The Company also tested
goodwill for impairment at May 31, 2003 and determined no impairment
existed.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This change in accounting policy is not applied retroactively and the
amounts presented for prior periods have not been restated for this change.
The impact on the historical results had the change been applied
retroactively is as follows:
Years ended May 31
-------------------------------------
(Amounts in 000's except for per share data) 2003 2002 2001
-----------------------------------------------------------------------------------------
Loss for the year $16,634 $13,487 $15,213
Amortization of goodwill - (1,454) (1,455)
-----------------------------------------------------------------------------------------
$16,634 $12,033 $13,758
-----------------------------------------------------------------------------------------
Net loss per share $ 0.12 $ 0.09 $ 0.11
Net loss per share before goodwill amortization $ 0.12 $ 0.08 $ 0.10
-----------------------------------------------------------------------------------------
Stock-Based Compensation
In December 2001, the CICA issued Handbook Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments." Section 3870 establishes
standards for the recognition, measurement, and disclosure of stock-based
compensation and other stock-based payments made in exchange for goods and
services provided by employees and non-employees. It applies to
transactions in which shares of common stock, stock options, or other
equity instruments are granted or liabilities incurred based on the price
of common stock or other equity instruments. The Company adopted Section
3870 for its fiscal year beginning June 1, 2002. The adoption of Section
3870 does not have an impact on the Company's financial condition or
results of operations as the Company's historically applied accounting
policy as described below is an acceptable policy within Section 3870.
Stock options granted to employees are accounted for using the intrinsic
value method. Under the intrinsic value method, compensation cost is
recorded if, on the measurement date of the grant, the fair value of an
underlying common share exceeds the exercise price per share. For options
with contingent vesting criteria, the option is treated as a variable award
and is revalued, using the intrinsic value method of accounting, at the end
of each reporting period until the final measurement date. Deferred
stock-based compensation is recognized as an expense over the vesting
period of the option.
The Company has a deferred share unit plan that provides directors the
alternative to receive payment for their current services in the form of
share units rather than common shares or cash. Share units entitle the
holder to receive, in the future, either an equivalent number of common
shares or the cash equivalent of the shares at the date the units are
exercised. As the award entitles the holder to settle the award through the
receipt of cash, the value of the share units are recorded as a liability
and the share units are revalued each reporting date with any increase or
decrease in value being recorded in the consolidated statement of loss.
Stock options granted to consultants and other non-employees are accounted
for using the fair value method. Under this method, options granted are
recognized at their fair value as services are performed and/or options are
earned.
Income Taxes
Income taxes are reported using the asset and liability method. Under this
method future tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases,
and operating loss and research and development expenditure carry forwards.
Future tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply when the asset is
realized or the liability is settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the period
that substantive enactment or enactment occurs. A valuation allowance is
recorded for the portion of the future tax assets where the realization of
any value is uncertain.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Share
Basic net loss per common share is calculated by dividing the net loss by
the weighted average number of common shares outstanding during the year.
Diluted net loss per common share is calculated by dividing the net loss by
the sum of the weighted average number of common shares outstanding and the
dilutive common equivalent shares outstanding during the year. Common
equivalent shares consist of the shares issuable upon exercise of stock
options and warrants calculated using the treasury stock method. Common
equivalent shares are not included in the calculation of the weighted
average number of shares outstanding for diluted net loss per common share
when the effect would be anti-dilutive.
Segmented Information
The Company is organized and operates as one operating segment, the
research and development of cancer therapies.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts presented in the
financial statements and the accompanying notes. Actual results could
differ from these estimates.
Foreign Currency Translation
Foreign currency transactions are translated into Canadian dollars at rates
prevailing on the transaction dates. Monetary assets and liabilities are
translated into Canadian dollars at the rates on the balance sheet dates.
Gains or losses resulting from these transactions are accounted for in the
loss for the period and are not significant.
3. Fixed Assets
As at May 31 (amounts in 000's) 2003 2002
-----------------------------------------------------------------
Furniture and equipment $1,603 $1,171
Leasehold improvements 898 139
-----------------------------------------------------------------
2,501 1,310
Accumulated depreciation and amortization (994) (777)
-----------------------------------------------------------------
$1,507 $ 533
-----------------------------------------------------------------
4. Acquired Research and Development
As at May 31 (amounts in 000's) 2003 2002
-----------------------------------------------------------
Cost $12,228 $12,228
Accumulated amortization (6,559) (4,812)
-----------------------------------------------------------
$ 5,669 $ 7,416
-----------------------------------------------------------
5. Share Capital
(a) Continuity of common shares and warrants
Common Shares Warrants
----------------------------------------------------------------------------------------------------
(Amounts and units in 000's) Number Amount Number Amount
----------------------------------------------------------------------------------------------------
Balance at May 31, 2000 139,665 $114,709 1,410 $754
Exercise of purchase warrants (b) 168 93 (168) (25)
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issuance under alternate compensation plan (c) 28 49 - -
Exercise of stock options 2,550 1,866 - -
Stock-based compensation - 351 - -
Other - 82 - -
----------------------------------------------------------------------------------------------------
Balance at May 31, 2001 142,411 117,150 1,242 729
----------------------------------------------------------------------------------------------------
Exercise of compensation warrants (b) 476 265 (476) (70)
Expiry of compensation warrants - 659 (766) (659)
Exercise of stock options 1,525 1,194 - -
Stock-based compensation - (100) - -
----------------------------------------------------------------------------------------------------
Balance at May 31, 2002 144,412 119,168 - -
----------------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 873 715 - -
Stock-based compensation - 558 - -
----------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2003 145,285 $120,441 - $ -
====================================================================================================
(b) October 1999 Private Placement of Special Warrants
In connection with the October 27, 1999 special warrants offering the
Company issued 2,824,849 compensation warrants (stated capital $0.147 per
warrant) for services in connection with the completion of the offering.
Each compensation warrant entitles the holder to acquire one common share
for $0.41 at any time prior to October 27, 2001. During fiscal year 2002,
475,700 compensation warrants were exercised. (2001 - 167,750)
(c) Alternate Compensation Plans
In 2000, the Company established a compensation plan for directors and
officers, which allows the Company, in certain circumstances, to issue
common shares to pay directors' fees or performance bonuses of officers in
lieu of cash. The number of common shares reserved for issuance under this
plan is 2,500,000. Since inception, 46,000 shares have been issued under
this plan.
The Company also established a deferred share unit plan that provides
directors the option of receiving payment for their services in the form of
share units rather than common shares or cash. Share units entitle the
director to receive, on termination of their services to the Company, an
equivalent number of common shares, or the cash equivalent of the market
value of the common shares at that future date. The share units are granted
based on the market value of the common shares on the date of issue. As of
May 31, 2003 45,964 deferred share units have been issued (2002 - 83,057),
with a cash value of $58,000 (2002 - $62,000) being recorded in accrued
liabilities.
(d) Stock Option Plan
Under the Company's stock option plan, options may be granted to directors,
officers, employees and consultants of the Company to purchase up to
12,000,000 common shares. Options are granted at the fair market value of
the common shares on the date of grant. Options vest at various rates and
have a term of five years. Stock option transactions for the three years
ended May 31, 2003 are summarized as follows:
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002 2001
----------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE average average
OPTIONS EXERCISE Options exercise Options exercise
(000's) PRICE (000's) price (000's) price
----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,425 $1.17 4,144 $1.19 6,310 $0.80
Granted 2,613 $0.72 3,188 $0.98 1,281 $2.08
Exercised (873) $0.83 (1,525) $0.78 (2,550) $0.73
Forfeited (1,787) $1.01 (382) $1.39 (897) $1.00
----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,378 $1.05 5,425 $1.17 4,144 $1.19
----------------------------------------------------------------------------------------------------------------
Exercisable at end of year 2,921 $1.26 2,183 $1.32 2,486 $0.95
----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at May 31, 2003:
Options outstanding Options exercisable
------------------------------------------------------ -------------------------------
Weighted-average
Options remaining Weighted- Options Weighted-
Range of outstanding contractual life average exercisable average
Exercise prices (000's) (years) exercise price (000's) exercise price
---------------------------------------------------------------------------------------------------------------------
$0.33 to $0.49 918 2.54 $0.37 543 $0.39
$0.50 to $0.99 3,227 3.76 $0.80 1,272 $0.79
$1.00 to $1.99 483 2.44 $1.58 455 $1.58
$2.00 to $3.63 750 2.06 $2.63 651 $2.66
---------------------------------------------------------------------------------------------------------------------
5,378 3.20 $1.05 2,921 $1.26
---------------------------------------------------------------------------------------------------------------------
(e) Deferred Stock-based Compensation
The Company recorded a deferred stock-based compensation charge relating to
options issued under the Company's stock option plan amounting to $558,000
for ended May 31, 2003 (2002 - recovery $100,000 and 2001 - charge
$351,000). Amortization of deferred stock-based compensation was $674,000
for the year ended May 31, 2003 (2002 - $296,000 and 2001 - $335,000).
(f) Pro forma disclosure for Employee Stock Based Compensation
The Company accounts for its stock options granted to employee using the
intrinsic value method. Section 3870 requires companies not using the fair
value method to disclose pro forma net earnings and earnings per share
information as if the company had accounted for employee stock options
under the fair value method. The Company has elected to disclose pro forma
net loss and pro forma net loss per share as if the Company had accounted
for its options since 1995 under the fair value method.
A summary of the pro forma impact on the statement of loss is presented in
the table below.
Years ended May 31
--------------------------------------
(Amounts in 000's) 2003 2002 2001
--------------------------------------------------------------------------------------
Loss for the year $16,634 $13,487 $15,213
Compensation expenses related to the fair
value of stock options 1,929 1,574 1,394
Employee stock-based compensation
expense as recorded (511) (296) (335)
--------------------------------------------------------------------------------------
Pro forma loss for the period $18,052 $14,765 $16,272
--------------------------------------------------------------------------------------
Pro forma loss per common share $ 0.12 $ 0.10 $ 0.12
--------------------------------------------------------------------------------------
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option granted or modified has been estimated at the
date of grant or modification using the Black-Scholes option pricing model
with the following assumptions used for options granted in the years ended
May 31 2003, 2002 and 2001: (i) dividend yield of 0%; (ii) expected
volatility of 110% (2002 - 80%, 2001 - 95%) (iii) risk free interest rates
ranging from 3.2% to 3.5% (2002 - 3.6%, 2001 - 5.4%) and (iv) expected
lives of 5 years. The Company has assumed no forfeiture rate as adjustments
for actual forfeitures are made in the year they occur. The weighted -
average grant date fair values of options issued in the years ended May 31,
2003, 2002 and 2001 were $0.75, $0.71 and $1.56 respectively.
6. Income Taxes
Income tax recoveries attributable to losses from operations differ from
the amounts computed by applying the combined Canadian federal and
provincial income tax rates to pretax income from operations primarily as a
result of the provision of a valuation allowance on net future income tax
benefits.
Significant components of the Company's future tax assets are as follows:
As at May 31 (amounts in 000's) 2003 2002
---------------------------------------------------------------------
Non-capital loss carryforwards $ 9,824 $ 7,870
Research and development expenditures 12,905 11,218
Book over tax depreciation 1,576 1,537
Other 492 787
---------------------------------------------------------------------
Future tax assets 24,797 21,412
Valuation allowance (24,797) (21,412)
---------------------------------------------------------------------
$ - $ -
---------------------------------------------------------------------
In assessing the realizable benefit from future tax assets, management
considers whether it is more likely than not that some portion or all of
the future tax assets will not be realized. The ultimate realization of
future tax assets is dependent on the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income, uncertainties related
to the industry in which the Company operates, and tax planning strategies
in making this assessment. Due to the Company's stage of development and
operations, and uncertainties related to the industry in which the Company
operates, the tax benefit of the above amounts have been completely offset
by a valuation allowance.
Research and development expenditures can be carried forward indefinitely.
To the extent that the non-capital loss carryforwards are not used, they
expire as follows:
Year of expiry (amounts in 000's) Non-capital losses
----------------------------------------------------------------------
2004 $ 2,022
2005 2,295
2006 3,702
2007 4,625
2008 4,985
2009 6,535
2010 8,453
----------------------------------------------------------------------
$32,617
----------------------------------------------------------------------
7. Research and Development Program
The Company's cancer drug research and development programs focus primarily
on the following technology
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
platforms:
(a) Immunotherapy
This clinical approach stimulates the body's natural defenses against
cancer. The Company's lead drug Virulizin(R) is currently in a Phase III
clinical trial for the treatment of pancreatic cancer and is being sold in
the private market in Mexico for malignant melanoma.
(b) Antisense
Antisense drugs are genetic molecules that inhibit the production of
disease-causing proteins. GTI-2040 and GTI-2501, the Company's lead
antisense drugs, have shown pre-clinical anti-cancer activity across a
broad range of cancers and are currently in phase II and phase I trials,
respectively.
(c) Small Molecules
Anti-cancer activity was discovered with an anti-fungal agent Clotrimazole
("CLT"). Based on the structural feature found to be responsible for the
anti-cancer effect of CLT, chemical analogues of CLT have been designed and
tested. The lead analogue NC381 is in the pre-clinical stage of
development.
Period from
Years ended May 31 inception
(amounts in 000's) --------------------------------- Sept. 5, 1986 to
Research and Development 2003 2002 2001 May 31, 2003
--------------------------------------------------------------------------------------
Immunotherapy
Expensed $ 7,433 $4,612 $2,161 $36,921
Acquired - - - -
Antisense
Expensed 4,911 3,410 7,116 18,209
Acquired - - - 11,000
Small Molecules
Expensed 206 637 520 3,929
Acquired - - - 1,228
--------------------------------------------------------------------------------------
Total expensed $12,550 $8,659 $9,797 $59,059
--------------------------------------------------------------------------------------
Total acquired $ - $ - $ - $12,228
--------------------------------------------------------------------------------------
8. Supplementary Cash Flow Information
Changes in non-cash working capital balances for each of the periods ended
are summarized as follows:
Period from
Years ended May 31 inception
--------------------------------- Sept. 5, 1986 to
(amounts in 000's) 2003 2002 2001 May 31, 2003
---------------------------------------------------------------------------------------------------
(INCREASE) DECREASE
Prepaid expenses and amounts receivable $ 91 $ 309 $ (409) $ (527)
Deferred charges - - - -
INCREASE (DECREASE)
Accounts payable 876 (2,686) 988 74
Accrued liabilities 1,052 253 1,269 3,802
---------------------------------------------------------------------------------------------------
$2,019 $(2,124) $1,848 $3,349
---------------------------------------------------------------------------------------------------
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended May 31, 2003, the Company received interest of
$1,679,000 (2002 - $2,488,000 and 2001 - $2,607,000).
9. Commitments
(a) Operating lease commitments
The Company has entered into operating leases for premises under which it
is obligated to make minimum annual payments of approximately $119,000 in
2004 and $102,000 in 2005.
During the year ended May 31, 2003, operating lease expenses was $122,000
(2002 - $118,000 and 2001 - $206,000).
(b) Other contractual commitments
In December 1997, the Company acquired certain patent rights and a
sub-license to develop and commercialize the anticancer application of
certain compounds in exchange for a 20% share interest in NuChem, the
payment of US $350,000 in shares of Lorus, and up to US$3,500,000 in cash.
To date the Company has made cash payments of US$500,000. The remaining
balance of up to US $3,000,000 remains payable upon the achievement of
certain milestones based on the commencement and completion of clinical
trials. Additional amounts paid will be classified as acquired research and
development and will be amortized over the estimated useful life of the
asset.
The Company holds an exclusive world-wide license from the University of
Manitoba (the "University") and Cancer Care Manitoba ("CCM") to certain
patent rights to develop and sublicense certain oligonucleotide
technologies. In consideration for the exclusive license of the patent
rights, the University and CCM are entitled to an aggregate of 1.67% of the
net sales received by the Company from the sale of products or processes
derived from the patent rights and 1.67% of all monies received by the
Company from sub-licenses of the patent rights. Any and all improvements to
any of the patent rights derived in whole or in part by the Company after
the date of the license agreement, being June 20, 1997, are not included
within the scope of the agreement and do not trigger any payment of
royalties. To date the Company has not paid any royalties pursuant to the
license agreement.
10. Related Party Transactions
During the year ended May 31, 2003, consulting fees of $48,874 were paid to
a company which is controlled by a director of the Company (2002 - $68,000
and 2001 - nil).
The amount payable to related parties as at May 31, 2003 was nil (2002 -
$46,000 and 2001 - $140,000).
11. Financial Instruments
The carrying values of cash and cash equivalents, short-term investments,
accounts payable and accrued liabilities approximate their fair values due
to the short-term nature of these instruments.
Financial instruments potentially exposing the Company to a concentration
of credit risk consist principally of cash equivalents and short-term
investments. The Company mitigates this risk by investing in high grade
fixed income securities.
12. Guarantees
During 2003 the Company adopted the new CICA Accounting Guideline ACG-14
"Disclosure of Guarantees, which requires certain disclosures of
obligations under guarantees.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into various contracts whereby contractors perform
certain services for the Company. The Company indemnifies the contractors
against costs, charges and expenses in respect of legal actions or
proceedings against the contractors in their capacity of servicing the
Company. The maximum amounts payable from these guarantees cannot be
reasonably estimated. Historically, the Company has not made significant
payments related to these guarantees.
13. Subsequent Events
On June 11, 2003, the Company raised net proceeds of $29.9 million by way
of a public offering of 26,220,000 units at a price of $1.25 per unit. Each
unit consists of one common share and one one-half of one purchase warrant.
Each whole warrant entitles the holder to purchase a common share at a
price of $1.75 at any time on or before December 10, 2004. In addition the
Company issued 1,835,400 compensation options for services in connection
with the completion of the offering. Each compensation option entitles the
holder to acquire one unit for $1.27 at any time on or before December 10,
2004.
14 Canada and United States Accounting Policy Differences
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") as applied in Canada. In certain
respects, GAAP as applied in the United States differs from that applied in
Canada. There are no material measurement differences between Canadian GAAP
and United States GAAP that apply to the consolidated financial statements.
(a) SFAS 130 Reporting Comprehensive Income
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income. This standard defines comprehensive income as the
changes in equity of an enterprise except those resulting from shareholder
transactions. Comprehensive loss for the periods presented in these
financial statements equaled the loss for the period.
(b) Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123." This Statement amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002
and are included in the notes to these consolidated financial statements.
Effective January 1, 2003, the Company adopted the initial recognition and
measurement provisions of FASB interpretation No. 45 "Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which apply on a
prospective basis to certain guarantees issued or modified after December
31, 2002. FIN 45 requires that a liability be recognized for the estimated
fair value of the guarantee at its inception. The Company has entered into
agreements that contain features which meet the definition of a guarantee
under FIN 45 as described in note 12. The maximum amounts from these
guarantees cannot be reasonably estimated. Historically, the Company has
not made significant payments related to these guarantees. The adoption of
FIN 45 did not have a material impact on the business, results of
operations and financial condition of the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when
the Interpretation becomes effective. The application of this
Interpretation will not have a material effect on the Company's financial
statements.
53
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer (CEO) and acting
Chief Financial Officer (CFO), of the effectiveness of the design and operation
of the Company's disclosure controls and procedures, as defined in the rules of
the U.S. Securities and Exchange Commission. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures are effective as of May 31, 2003, except that
certain information required to be furnished under cover of Form 6-K was filed
later than the information was required to be filed. The Company has timely
filed all required documents in its home jurisdiction.
It should be noted that while the Company's management believes that the
Company's disclosure controls and procedures provide a reasonable level of
assurance, they do not expect that the Company's disclosure controls and
procedures or internal controls will prevent all error and fraud. A control
system, no matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
During the fiscal year ended May 31, 2003, there have been no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
54
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant certifies that
it meets all of the requirements for filing on Form 40-F and has duly caused
this annual report to be signed on its behalf by the undersigned, thereunto duly
authorized, on November --, 2003.
LORUS THERAPEUTICS INC.
By: /s/ Shane A. Ellis
--------------------------
Name: Shane A. Ellis
Title: Corporate Secretary & Vice
President of Legal Affairs
EXHIBIT INDEX
<Table>
<Caption>
Exhibit Description
- ------- -----------
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Consent of Auditors.
</Table>